Advanced Business and Financial Management (ABFM).
IIBF Syllabus consists the following 4 Modules –
Module A: The Management Process
Module B: Advanced Concepts of Financial Management
Module C: Valuation, Mergers & Acquisitions
Module D: Emerging Business Solutions
Advanced Business & Financial Management
Module A: The Management Process
Basics of Management
Definition of Management, The Management Process, Functions of Management, Importance of Management, Management Thoughts & Approaches, Management Challenges & Opportunities, Introduction to Strategic Management, Business Environment Analysis
Planning
Fundamentals of Planning, Steps in Planning, Importance of Planning, Advantages and disadvantages of planning, Management by Objectives, Plan Components, Contingency planning, Forecasting & Decision Making
Organizing
Introduction and Fundamentals of Organizing, Importance of Organisation, Stages in Organising Process, The Organising Process, Principles of organizing, Types of Organisations, Organisation structure, Organisation charts and manuals, The Organisation culture, Authority & Responsibility, Key Issues in Organisation Structure, Organisational Change, Conflict Dynamics
Staffing
Functions of Staffing, Objectives of staffing, Nature of staffing, Facets of staffing, Significance of staffing, System approach to staffing, Recruitment, Selection, Training, Retention and development, Knowledge and learning management, Performance Appraisal, Human Resource Development Directing
Characteristics of directing, Importance of directing, Elements of directing, Leadership, Motivation, Communication, Supervision
Controlling
Basics of Controlling, Characteristics of controlling, Advantages of controlling, Limitations of controlling, Types of control management, Control process, Relation between planning and control, Control Techniques, Control technique and Information Technology
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Module B: Advanced Concepts of Financial Management
Sources of Finance and Financial Strategies
Equity Capital, Internal Accruals, Preference Capital, Term Loans, Debentures, Alternative Financing Strategies in the Context of Regulatory Requirements
Financial and Operating Leverages
Financial Leverage, Degree of Financial Leverage and its Behaviour, Operating Leverage, Degree of Operating Leverage and its Behaviour, Combined or Total Leverage
Capital Investment Decisions
Objective of capital investment decisions, Estimation of project cash flows, Forecasting and its relation to regulation of capital for short, medium and long term periods, Relationship between sales, production and other functional budgets, Cash Forecasts, Cost analysis for projects, Methods of Investment appraisal; Social Cost Benefit Analysis
Capital Budgeting for International Project Investment Decisions
Foreign Investment Analysis, Special Considerations-Foreign & Home Currency Cash Flows, Foreign Currency Discount Rates Computation, International Portfolio Investment and Institutional Constraints, Direct and Indirect Channels for International Portfolio Investment, Exchange and Country Risk, Return and Risk of Foreign Investment, Capital asset pricing model, Arbitrage pricing theory; International Capital Budgeting Issues involved in overseas projects, Approaches for evaluation of overseas projects, Evaluation methods, , Impact of transfer pricing
Adjustment of Risk and Uncertainty in Capital Budgeting Decision
Sources & Perspectives on Risk, Sensitivity Analysis, Scenario Analysis, Hillier Model, Simulation Analysis, Decision Tree Analysis, Corporate Risk Analysis, Managing Risk, Project Selection Under Risk, Risk Analysis in Practice
Decision Making
Decision Making using Cost-Volume-Profit (CVP) Analysis, Decision Making using Relevant Cost Concepts, Decision Making using Activity Based Costing, Ethical and Non-Financial Considerations Relevant to Decision Making
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Module C: Valuation, Mergers & Acquisitions
Corporate Valuations
Approaches to Corporate Valuation, Adjusted Book Value Approach, Stock and Debt Approach, Direct Comparison Approach, Discounted Cash Flow Approach, Steps involved in valuation using DCF Approach,
Discounted Cash Flow Valuation
Estimating Inputs, Approaches to Discounted Cash Flow Models, Various discounted Cash Flow Models, Dividend Discount Model, Applicability of the Dividend Discount Model, Other Non-DCF valuation models Relative valuation model, Equity Valuation Multiples Model, , Enterprise value multiples Model, Choosing the right multiples, Book value approach Model, Stock and debt approach
Special cases of valuation
Intangibles –Brand, Human valuation etc., Real estate Firms, Start-up firms, Firms with negative or low earnings, Financial Service companies, Distressed firms, Valuation of cash and cross holdings, Warrants and convertibles, Cyclical & non-cyclical companies, Holding companies, E-commerce firms
Mergers, Acquisitions and Restructuring
Types of Transactions, Reasons for Merger, Mechanics of a Merger, Costs and Benefits of a Merger, Exchange Ratio in a Merger, Purchase of a Division / Plant, Takeovers, Leveraged Buyouts, Acquisition Financing, Business Alliances, Managing Acquisitions, Divestitures, Holding Company, Demergers Deal structuring and financial strategies
Negotiations, Payment and legal considerations, Tax and accounting considerations, Tax reliefs and benefits in case of Amalgamation in India, Financial reporting of business combinations, Deal Financing, Financing of cross border acquisitions in India
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Module D: Emerging Business Solutions
Hybrid Finance
Advantages and disadvantages of Hybrid securities, Types of hybrid securities, Preference Share Capital, Features of Warrants, Features of Convertible Debentures, Differences between Warrants and Convertible debentures, Valuation of Warrants, Valuation of Compulsorily Convertible (Partly or fully) Debentures, Objective of issuing Warrants and Convertible debentures, Features of Foreign Currency Convertible Bond (FCCB), Mezzanine Financing, Innovative Hybrids
Start-up Finance
Benefits to startup under the Startup Plan, Startup definition in India, Challenges faced by Startups, State Startup Policy, Pitch Presentation, Programmes and competitions for startups, Tax exemptions, Funding, Investor’s outlook in Startups, Funding schemes and programmes, International challenges and bridges
Private Equity and Venture Capital
Characteristics of Venture Capital Investments, Characteristics shared by Private Equity and Venture Capital as well as their key distinctions, Financing options available through Venture Capital, Investment in Private equity, Benefits obtained through private equity, Drawbacks to the practice of private equity, , Due diligence, Exit Strategies
Artificial Intelligence
History of Artificial Intelligence, Applicability of Artificial Intelligence, Artificial Intelligence in Banking and Finance, The future scope of Artificial Intelligence, Neural Networks, Control Theory and Cybernetics, Rational Agents, Motion and Manipulation, Tools and Techniques of Artificial Intelligence, Artificial Intelligence and Morality
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Business Analytics as Management Tool
Essentials of Business analytics, Types of Analytics, Elements of Business Analytics, Big Data Analytics, Web and Mobile Analytics, Comparing web Vs Mobile Analytics, Importance of Business Analytics Green and Sustainable Financing ISO Standards for Green Finance, Building Green Finance, International Best Practices towards Green Finance, Public Policy in India, Progress of Green Finance in India, Challenges and way forward, Growth of Regulatory Framework, National Efforts towards Green and Sustainable Financing, RBI Views on Climate Risk and Sustainable Finance
Special Purpose Acquisition Company
Advantages of SPAC, Disadvantages of SPAC, SPAC Formation and Timelines, The SPAC Merger, Stakeholders, Characteristics of SPACs, Process, SPAC Capital Structure, Trust Account, Warrants, Forward Purchase, IPO Agreements, De-SPAC Process.
01 - Basics of Management
01. Management is necessary for making our life or any task or venture we undertake, including any industrial, business or service activity, successful.
02. The term ‘Management’ could be referring to the persons running an organisation collectively, who are responsible for decision making.
03. The three components of management refer to their organising skills, their skills as an entrepreneur and getting the best out of their team members.
04. The skills for organising would obviously include the traditional skills, principles and the techniques of management which have evolved over a period of time and are continuously evolving.
05. Henri Fayol, widely acknowledged as the founder of modem management methods, was an early management writer who was instrumental in contributing immensely to ‘formal organisation theory’.
06. The theory propounded by Henri Fayol included the six types of organisational activities, which also included management. It also explained the various functions and principles of management.
07. Frederick Winslow Taylor, introduced methods to improve the industrial efficiency.
08. Taylor’s book ‘The Principles of Scientific Management’, published in the year 1911, is the most influential management book of the twentieth century.
09. Scientific management, also known as ‘Taylorism’, is a management theory which was used for analysing and synthesizing workflows with the main objective of improvement of economic efficiency and labour productivity.
10. Peter Drucker, the famous Management Guru, in his book Management: tasks, responsibilities, practices.
11. Management is not common sense alone but a discipline, a culture and an art and science at the same time.
12. Management represents people, and their achievements or failures denote the effectiveness of management or mismanagement of the organisation’s affairs.
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13. Productivity is very important in any business organisation, and there is a continuous demand on the people at the helm of affairs to increase productivity for increasing profits to meet the expectations of the stakeholders and the society.
14. The process of management involves multiple actions performed in a series to achieve the objectives of the business enterprise.
15. The process of management can be classified as a social process as it involves relationships and co-operation between people and their team effort.
16. The complexity of management has laid down the foundation of breaking down each activity into various parts or sub-activities so that we can understand the complete significance of each activity. This is the reason for division of management tasks into different elements: planning, organising, staffing, directing and controlling.
16. A manager is responsible for planning, for directing and leading the workers and other staff, and for monitoring and controlling performances at work, through proper governance and risk management.
17. The System School of Management thought was propounded by Daniel Katz, an American Psychologist, and Ludwig Von Bertalanffy, an Australian Biologist. They advocated the concept of management being an open system, which is required to interact with the environment constantly for getting resources, which are both valuable and limited.
18. The main objective of the research undertaken by the systems school was to understand the external environment and conditions faced by an organisation and finding ways of handling such conditions.
19. The open system approach is important because of the interaction between an organisation and the outside forces and the outside influence impacting the actions taken by the organisation.
20. The Contingency School of Management thought was an offshoot of the scientific, behavioural and systems approaches to management, and stated that there cannot be a unique way of managing an organisation and which can be labelled as the best way to manage or lead a business.
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21. The best or the optimal way shall always depend or be contingent on the internal and external environment. In other words, there cannot be a standard solution to various business situations faced by the management. Each leader might deal with the same situation in different ways, depending on his/her leadership style.
22. The contingency school of management thought is criticised for being reactive and for failure to be proactive and for not providing some standard principles and procedures to be applied in specific situations.
This approach can turn out to be expensive in terms of money and time and development of a proper theory of management principles becomes almost impossible.
23. The Contemporary School of Management theory continues to advance because of constant evolution of business practices and management techniques, especially in the wake of technological advancements.
24. Total Quality Management focuses on the management of an organisation for delivering high quality goods and services to its customers. The approach originated in Japan after the Second World War.
25. The four main elements of Total Quality Management approach are:
a) Employee involvement:
b) Customer focus:
c) Standardisation:
d) Continuous Monitoring:
26. Deming, Juran and Crosby were three main contributors to the Total Quality Management approach.
27. William Edwards Deming considered the quality of people more important than the quality of products and accorded greater importance to how efficiently the management planned, implemented and improved the projects.
28. William Edwards Deming laid down the fourteen principles of Total Quality Management:
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29. Learning Organisation may be defined as an organisation where all the employees take part in identifying and solving the problems which it faces, and which permits the organisation to continuously enhance its capacity to grow and learn, so as to achieve the organisational goals.
30. A Learning Organisation shall be organised from the angle of problem-solving and not from the perspective of efficiency and shall have a structure which is based on teamwork, employees who are empowered and shall have an open information system.
31. The major contributor to Learning Organisation school of thought is Peter Senge, has defined Learning Organisations in his book, The Fifth Discipline: The Art & Practice of Learning Organization.
32. The five disciplines of a Learning Organisation are:
1. Personal Master
2. Shared vision
3. Mental Models
4. Team learning
5. Systems Thinking
33. A Learning Organisation is important because:
a) It always tries to find improved and innovative ways of doing things and staying ahead of the competition.
b) The effectiveness and efficiency of a learning organisation is very high.
c) A learning organisation has higher productivity and output.
d) A learning organisation helps in enhancing the image of the company.
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34. Several issues which are faced by the management include:
a) Which business model to adopt?
b) How to manage the information explosion?
c) How to manage the changes taking place every now and then?
d) How to face the threat of globalisation?
e) How to manage the impact of environmental sustainability?
35. Business models are based on the type of clients to be served, the product offerings, the revenue earning model, ways of differentiating and sustaining competitive advantages, and the manner in which products or services are provided.
36. The management of a business entity shall be able to perform better if it understands the business model followed by the organisation.
37. A business model covers the important operational characteristics and key structural features of the business.
38. Some of the Business Models are
a) Solution Providing or Consulting Services Model
b) Profit Pyramid Model
c) Multi-component Systems Model
d) Advertisement Model
e) Switchboard Model
f) Time Model
g) Efficiency model
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39. Under Solution Providing or Consulting Services Model, the business may provide consulting services which help improve the client’s operations. IBM has used this model.
40. Under Profit Pyramid Model, the customers are provided low-priced products initially and gradually they are moved to expensive products, where the business earns higher profits. General Motors followed this model.
41. Multi-component Systems Models have been used by companies like Gillette and HP.
42. Advertisement Models offer the basic product free and make money through advertising. YouTube, Google etc. are live examples.
43. Switchboard Model allows a firm to acts as an intermediary for connecting multiple sellers with multiple buyers. eBay, Amazon, Flipkart are businesses which have used this model successfully.
44. Time Model depends on how fast research and development happens. A business which pioneers some new idea shall be successful initially, till other competitors join the bandwagon.
45. A business following Efficiency model just waits for the market to mature with standardisation of the product and enters with low-cost and low-margin products with mass appeal. Southwest Airlines, Wal-Mart and Dell have been using this model.
46. Blockbuster model is used by industries which are having the protection under patent laws, like pharma and film industry, where profits depend on a few items and are driven by star appeal.
47. Profit multiplier model involves developing concepts which may or may not be profitable but are used for driving other products through synergy. The management looks at the whole picture in such cases. For example, Walt Disney used cartoon characters for developing theme parks, merchandise, and licensing opportunities, which gave them huge profits.
48. Entrepreneurial model deals with offering specialized products or services to clients which are not attractive to large competitors but have potential of fast growth. There are so many cases today where big companies like Tata’s have acquired smaller players with potential, e.g., IMG was acquired by Tata’s.
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49. Under De Facto industry standard model free products may be offered at a very low cost to increase the market share and for saturating the market to make everybody talk about the product as a great brand and industry standard. Subsequently, the users are offered high-end and high-margin products. Microsoft indulged into this strategy.
50. Business models invariably involve the optimisation of profits by using optimum product mix.
51. Economic growth must be inclusive to provide sustainable jobs and promote equality.
52. Strategic management is defined as the process by which a firm manages the formulation and implementation of its strategy.
53. The word strategy comes from the Greek word, strategos, meaning the “General’s views”.
54. A Strategy combines explicit statements and implicit beliefs and understandings in and around an organization about
Mission; • Vision; Clientele; Resources; • Present and Future
55. A strategy encompasses the pattern of organizational actions that have been taken and those that are to be taken by an organization, in pursuing its objectives.
56. Strategy outlines the means by which a firm intends to create unique value for customers and other important stakeholders.
57. Strategic Management involves those decisions and actions of the management that determine the long-term performance of a business entity.
58. The various elements of strategic management include scanning of the external and internal environment, formulation of long term strategic plans, implementation of strategy and the evaluation and control process.
59. A plan is an arrangement, a pattern, a programme, or a scheme for a definite purpose.
60. A plan is very concrete in nature and does not allow for deviation.
61. A plan provides a coherent framework from which to build and a sure direction to follow, with intermittent milestones to pass, to reach an end goal.
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62. A strategy is a blueprint, layout, design, or idea used to accomplish a specific goal.
63. A strategy is very flexible and open for adaptation and change when needed.
64. Strategy is most useful when creativity, collaboration, and innovation are of the utmost importance.
65. A strategy encourages openness and debate from every side of the equation.
66. A strategy embraces questions and out-of-the-box, effective answers.
67. A strategy allows for a natural flow of thought and continual momentum that builds, till success is reached.
68. The strategy followed by a business entity can be equated with a master plan, which contains details as to how the mission and business goals of the entity shall be achieved.
69. The purpose of the strategy of the organization is maximizing the competitive advantages and, at the same time, minimizing the competitive disadvantages.
70. A typical business entity normally considers three different types of strategies, as under:
a) Corporate strategy
b) Business strategy
c) Functional strategy
71. Corporate strategy of a company covers the overall direction followed by the company.
72. Corporate strategy would spell out the general attitude of the company towards growing and managing its different business lines, products and services.
73. A corporate strategy may be classified under the three different categories of stability, growth, and retrenchment.
74. Business strategy would normally be prepared at the level of the business unit or at the level of product or service and it normally highlights the improvement in
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the specific industry or market ranking of the business entity’s products or services produced or delivered by that business unit.
75. A business strategy could be competitive or cooperatives.
76. Under a competitive strategy, a company might try to differentiate its services.
77. A cooperative strategy may form an alliance with other companies to extend its reach to global markets and get a competitive advantage.
78. Functional strategy refers to the approach adopted by functional areas for achieving the objectives of the business unit and the company by maximizing the productivity of available resources.
79. Functional strategy involves the development and fostering a distinctive capability to create a competitive advantage.
80. In practice, a business entity may use all the three types of strategies ( Corporate strategy; Business strategy and Functional strategy ) at the same time.
81. Strategic Management has the following four basic elements:
The context (Environmental Scanning)
Strategy Implementation
Strategy Formulation
Strategy Evaluation & Control
82. The Context (Environmental Scanning) refers to monitoring, evaluation and dissemination of information received from the internal and external environments. The information is provided to the key people in the organisation with the overall objective of identifying both internal as well as external strategic factors, which can impact the future of the organisation.
83. SWOT Analysis is one of the easiest ways of conducting environment scanning.
84. The acronym SWOT refers the Strengths, Weaknesses, Opportunities, and Threats, applicable to a specific organisation.
85. Strengths and Weaknesses form part of the internal environment of an organisation and could cover the organisation structure, the resources available to an organisation and the overall organisational culture.
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86. The core competencies of an organisation depend on its strengths.
87. The internal environment can usually be controlled by the top management in the short run.
88. The Opportunities and Threats form part of external factors and are generally outside the ambit of the top management’s short-term control. These factors could be general, as well as specific factors. The general factors generally impact the entire economy or an industry whereas the specific factors might impact a specific industry or an organisation.
89. The internal and external environmental factors form the context within which an organisation exists.
90. Strategy Formulation requires, on the basis of information gathered from situation analysis, to set strategic direction through business mission and vision statements, and establish strategic objectives to reach there, and generate, evaluate and select corporate, business and functional strategies to pursue.
91. Creating vision is the essential act of leadership.
92. The vision must relate to the expectations of its customers, while being grand enough and imaginative enough to fuel the employees’ spirit.
93. The vision gives the organization its energy.
94. The vision usually requires a “leap of faith” and an “act of courage”.
95. A vision is an optimistic, inspiring picture that brings with it the responsibility to make it happen.
96. A vision is a dream of greatness!
97. Vision is a simple statement or understanding of what the firm will be in the future.
98. A vision is forward looking and identifies the desired long-term status.
99. A vision statement should answer the basic question, “What do we want to become?”
100. A clear vision provides the foundation for developing a comprehensive mission statement.
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101. Ideally, vision statement should be short, preferably one sentence.
102. The mission statement is usually depicted as the starting point in the strategic planning process.
103. The mission statement spells out the underlying motivation for being in business in the first place - the contribution to society that the firm aspires to make.
104. A mission statement is called a statement of purpose, a statement of philosophy, a statement of beliefs, a statement of business principles, or a statement “defining our business,”.
105. A mission statement reveals what an organization wants to be and whom it wants to serve.
106. Organizational mission statements should include ten components: customers, products or services, markets, technology, concern for survival, growth and profitability, philosophy, self-concept, concern for public image, and concern for employees.
107. Successful strategies are dependent on effective implementation.
108. Strategy implementation is the fine art of detailing: what all is to be done, when various tasks are to be performed, where are they to be performed, how they are to be performed and who will perform.
109. Strategy implementation is the process of executing the strategy – of taking the actions that put the strategy into effect and ensure that organizational decisions are consistent with it.
110. While strategy formulation is the process of deciding what to do, strategy implementation is the process of performing all the activities necessary to do what has been formulated.
111. Strategy evaluation is a logical step to obtain feedback from strategy’s performance and taking corrective actions, if needed, in the light of constant external and internal changes. Strategy evaluation is needed because success today does not guarantee success tomorrow.
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112. Phases of Strategic Management – A business entity normally develops its strategy in the following four phases –
Basic Budgetary Planning
Forecast-based Planning
Externally Oriented (Strategic) Planning
Strategic Management
113. The three most important benefits of strategic management are as under:
a) The management gets a clearer sense of strategic vision of the business entity.
b) Management is able to clearly focus on strategically important issues, faced by the entity.
c) The dynamic environment can be better understood by management.
114. strategic management is crucial for the success of an organisation in the long-term and may mark the difference between a successful and an unsuccessful organisation.
115. Management is the process of creating an environment which helps individuals, who work in groups, to achieve business goals established by the various stakeholders. T
116. The process of Management involves planning, organising, staffing, directing and controlling.
117. The various management approaches and thoughts include the Classical Basics of Management or Traditional School, the Neoclassical or Behavioural School, the Quantitative School or Management Science, the System School, the Contingency School and the Contemporary School.
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02. Planning
01. Planning is the process of engaging in thoughtful discussion before undertaking a task, which entails engaging in in-depth contemplation about that task and going into all the details meticulously to be ready with an execution and implementation plan, to save both effort and time.
02 Planning involves doing an objective analysis of future requirements, to facilitate the modification of ongoing activities considering the objective that has been set.
03. Planning involves research that is done deliberately and consciously to formulate the design and the orderly series of actions, through which it is anticipated to succeed in accomplishing goals.
04. During the planning, each possibility, both present and future, that is even remotely connected to the, will be taken into consideration.
05. The planning process incorporates consideration of every conceivable risk, including losses, defections, and so on.
06. Planning process engages deeply in various activities to give directions, prescribe methods, evolve procedures, and transform activities, to decide to accomplish the business goals in an efficient and effective manner.
07. The process of planning is based not only on the finances, time frame, infrastructure, and resources, but also since decisions and particular or directional plans, which might be strategical, tactical, or operational, are made based on those considerations.
08. Planning covers
a) What is to be done?
b) Where it is to be done?
c) How it is to be done?
d) When it is to be done?
e) Who will execute?
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09. The process of planning consists of the following steps:
a) Opportunity Analysis:
b) Objective Establishment:
c) Developing Planning Premises:
10. Opportunity Analysis entails analysing the opportunity, being aware of the opportunity, and basing the development of the business plans on this opportunity.
11. Opportunity Analysis exercise involves comprehending the existing circumstances of the available opportunity and having a general understanding of its future prospects.
12. Without knowing the objective, it is impossible to develop a strategy for its accomplishment. Objectives are, therefore, the initial step in the planning process, which is typically a political endeavour.
13. The collection of future forecasting-derived assumptions is known as the planning premises determination.
14. The process of determining the availability of various means to attain goals is referred to as “identifying alternative means.”
15. Following the discovery of additional methods and an examination of both their strong and weak points, the planner should assess the alternative methods.
16. In the stage “selecting the best alternative.” the question that must be resolved is whether the initial plan is superior or whether the alternate strategy is going to be effective.
17. Derivative plans refer to sub plans or secondary plans.
18. Planning is a continuous process for ensuring attainment of business objectives.
19. Planning is a process of fixing objectives and finding ways of accomplishing them
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20. The following points highlight the importance of planning:
1) Helps Goal Creation
2) Provides Direction
3) Tackles Uncertainty
4) Discards overlapping and wasteful activities
5) Promotes Innovative Ideas
6) Decision Making Facilitation
7) Controlling
21. A SMART goal is a carefully planned, clear and trackable objective.
22. SMART is an acronym that stands for Specific, Measurable, Achievable, Realistic, and Timely.
23 The main advantages of planning are as follows:
i. Coordination of Various Activities:
ii. Optimisation of Resources:
iii. Inspirations and Responsibilities:
iv. Establishment of Execution Principles:
24. Some of disadvantages of planning are as under:
i. Forestalls Activity:
ii. Lack of Concern:
iii. Forestalls Adaptability:
iv. Hinders Innovativeness:
25. Death by Planning is “high-level procrastination”,
26. Death by Planning is when an individual or a team spends so much time in the planning phase that they run out of time to execute the plan/project.
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27. During the planning process, goals are formed from the organisation’s mission and vision.
28. The phrase “management by objective” (MBO) was coined by Peter F. Ducker and first appeared in his book “The Practice of Management,” which was published in 1954.
29. Management by Objectives is the term given to the process that is used for goal planning and the establishment of clear parameters for those goals (MBO).
30. The MBO technique, in its most fundamental form, refers to a procedure that involves the management and the employees working together to jointly establish, record, and then monitor the goals for a particular period of time.
31. MBO process includes the following
Establish goals and desired outcomes for each subordinate in a conference between the management and the concerned subordinate.
Set performance standards.
Assess performance achieved against goals set for the employee through frequent performance review meetings between the manager and the subordinate.
Identify reasons for shortfall and give feed-back for improvement.
Establish new goals and new strategies for the coming year.
32. Planning is the central idea behind the ‘Management by Objectives’ and it implies that an Organisation and the people, who make up that Organisation, aren’t just responding to incidents and issues; rather, they are being pro-active and are taking preventative measures.
33. Employees are allowed to define measurable personal goals in accordance with the corporate goal, to fulfil the criteria of ‘Management by Objectives’.
34. The five steps that make up the management by objectives technique are as follows:
a) The first thing to do is either establish or alter the organisational goals for the whole company. The company’s mission and vision should serve as the basis for developing this comprehensive overview.
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b) The second step is to communicate to employees the goals and priorities of the organisation.
c) The third step is to encourage participation from the staff members in the process of setting individual goals.
d) The monitoring of the progress made by the staff members is the focus of the fourth step.
e) The fifth step is to evaluate and then reward the progress that employees have made.
35. “Environmental Analysis” refers to the process of examining all of the factors, both internal and external, that have an impact on the performance of the organisation. This can be done both systematically and qualitatively.
36. Environmental Analysis Steps
a) Identifying
b) Scanning
c) Analysing
d) Forecasting
37. PESTLE Analysis is a method for evaluating the business environment and the potential impact that it could have on the performance of the organisation.
38. The acronym PESTLE refers to the following six internal factors that can have an impact on company - a) Political ; b) Economic; c) Social ; d) Technological; e) Legal, and f) Environmental.
39. PESTEL analysis involves three steps:
a) Identify the relevance of each of the PESTEL factors to the firm
b) Identify and categorize the information for each factor
c) Analyze the data and draw conclusions
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40. Advantages of PESTLE analysis:
a) Cost effectiveness
b) Easy framework
c) Deep understanding
d) Development alertness
e) Opportunities exploitation
41. An internal environment analysis is a tool that allows for a comprehensive review of all aspects of a company’s operations, internal guidance, and mission. This review is done in order to identify opportunities and threats.
42. This internal analysis, which is initiated by the management of the company, is an attempt to identify the areas of risk and opportunity in the business.
43. Internal analysis reveals both the organization’s strengths and its weaknesses in these areas.
44. Internal Analysis tools
a) GAP Analysis
b) Strategy Evaluation
c) SWOT Analysis
45. GAP Analysis is a tool for conducting assessments that gives organisations the ability to analyse and identify internal weaknesses as well as performance deficiencies.
46. The process of analysing the outcomes brought about by the execution of a strategic plan is referred to as Strategy Evaluation.
47. In the process of carrying out the Strategy Evaluation, it is very useful and helpful to check that everybody understands the business strategy and works well with it.
48. The process of planning begins with the establishment of objectives, which is a crucial step.
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49. The planning principles that serve as the basis for the activity of planning are referred to as premises.
50. Planning is always for the future that cannot be foretold.
51. The term “forecast” refers to making a prediction about the future, either about what will happen or about what will not happen; this prediction will not always be true but will sometimes provide accurate outcomes.
52. The main criteria for evaluating alternatives are:
a) Cost, Profitability, Break-even Point
b) Market, Sales potential, Competitive reaction
c) Ability to meet corporate objectives
d) Strengths and weaknesses
e) Timing
f) Intuition about success
53. Contingency plans can be defined as alternative plans that can be put into effect if certain key events do not occur as expected.
54. The contingency plans are referred to as “Plan B” because they always work as an alternative course of action if things do not go as planned.
55. A contingency plan is defined as an action of designing to assist the company in responding to an event that may or may not occur.
56. The term “contingency planning” refers to more than preparing for major catastrophes and natural disasters. It can also put you in a position where you are susceptible to more prevalent concerns, such as the loss of data, staff, clients, or commercial relationships.
57. Contingency planning is a response to risk faced by an organisation; however, in certain circumstances, it may be safer or more cost-effective to deal with it in other ways and to avoid risk, such as by investing in new equipment or to share the risk by purchasing an insurance policy. Alternatively, one can choose not to formally plan for certain low priorities risk but to manage the risk when it does occur.
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58. Contingency Planning begins with the identification of both beneficial and unfavourable events that could possibly derail a strategy or strategies.
59. Contingency Planning involves the following:
a) Specifying trigger points.
b) Estimating when contingent events are likely to occur.
c) Assessing the impact of each contingent event.
d) Estimating the potential benefit or harm of each contingent event.
e) Developing alternate plans.
f) Being sure that the contingency plans are compatible with current strategy and that they are financially feasible.
60. The process of predicting or estimating the future based on the evidence from the past and the present is referred to as forecasting.
61. Types of Forecasts
1. Long Term Forecasts
2. Medium Term Forecasts
3. Short Term Forecasts
62. Forecasting for the long term typically covers a period of time ranging from three to five years.
63. The term “short term forecasting” refers to planning that is done for a period that is relatively brief, with the planning period being less than one year and the duration ranging from one to six months.
64. Forecasting process and its elements
a) Identifying and Developing the Structure:
b) Estimating future Course of Business:
c) Analysis of Deviations in previous forecasts:
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65. Actual selection of one course of action, from among several alternatives, is called decision-making.
66. Decision-making is a rational process and, to have a high degree of effectiveness, should be based on systematic analysis of all the relevant facts and not based on just intuition.
67. Decision making plays an important role in enhancing the efficiency of the organisation as decisions relating to future course of action, are taken in advance.
68. Decision making by groups, generally, results in the following advantages:
a) Thorough evaluation:
b) Implement of decisions is easier:
c) Enhanced team spirit:
69. Disadvantages of Group Decisions
a) Time consuming and costly:
b) Disagreements and indecisions:
70 The planning process sets the foundation for (a) Controlling.
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03. Organising
01. Planning is the first step in the process of managing an organisation, and the second step is organising, which is the function of management that comes after planning.
02. Organising entails assigning tasks, grouping tasks into departments, and assigning authority with adequate responsibility, as well as allocating resources within an organisation to achieve common goals.
03. Organising is the process of establishing or organising effective authority relationships between selected tasks, individuals, and workplaces to group work together in an efficient manner, as well as the process of separating work into sections and departments.
04. If managerial planning is concerned with establishing what tasks should be performed, then organising is concerned with determining how those tasks should be performed.
05. Organising entails grouping activities and resources in a way that makes sense.
06. Classical closed systems and open systems are the two primary classifications that can be used to classify various strategies for the division and coordination of work activities as well as the distribution of resources.
07. The process of organising and management is the act of establishing methodical applications for available resources within a system.
08. Organising Capabilities Management is the capacity to develop systematic use of resources inside the system and organising skills are very necessary for management.
09. The term “organisation” is used to describe the final product of the organising process.
10. The way labour is subdivided, and the way coordination is guaranteed between the various tasks and the persons conducting them independently, are both referred to as the “design” of the organisation.
11. Processes are the de-facto levers that are used to achieve organisational efficiency and effectiveness.
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12. Organising brings together a variety of resources to work towards a shared goal.
13. The most important factors considered in organising are as under:
a) Efficiency in Administration:
b) Resource Optimization:
c) Gaining Expertise:
d) Promoting Effective Communication:
e) Creating Transparency:
f) Expansion and Development:
14. The following are five stages in the organising process,
a) Defining and reviewing the plans and objectives of the company.
b) Determining the work activities needed to accomplish the objectives
c) Categorising and grouping essential work activities into manageable units
d) Assigning activities and delegating authority
e) Designing a hierarchy of relationships
15. An organisation is the end result of the organising process.
16. An organisation is a whole that consists of integrated pieces that work together in harmony to carry out duties in order to achieve goals in a manner that is both effective and efficient.
17. Delegating tasks and responsibilities to employees and providing them with the authority they need to successfully cany out these responsibilities and tasks is another aspect of organising a business.
18. Delegating responsibilities and assigning the appropriate level of power are two essential components of an effective organisation.
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19. The process of organisation has following five stages
a) Review of plans and objectives:
b) Determining the work activities needed to accomplish the objectives:
c) Categorising and grouping essential work activities into manageable units:
d) Assigning activities and delegating authority:
e) Designing a hierarchy of relationships:
20. The Process of organising also includes:
a) Determining Objectives:
b) Classifying Activities:
c) Assigning of Duties:
21. Organising principles represent the truths of a fundamental nature that underpin the management function.
22. The principles of Organising refer to
a) Work Specialization
b) Authority
c) Chain of Command
d) Delegation
e) Span of Control
23. According to the principle of Unity of Command, each worker should have just one manager, supervisor, or other reporting authority to whom he or she is directly accountable for work-related matters. This is done to eliminate the possibility of the employee being placed in a state of confusion as a result of receiving demands or priorities from multiple supervisors that are in direct opposition to one another.
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24. According to the Scalar Principle, there ought to be a transparent chain of command that extends from the position of supreme authority at the very top of the organisation to each and every person working there, connecting all of the managers working at the various levels.
25. Scalar Principle involves a concept known as a Gang Plank, which allows a subordinate to contact a superior or his superior in an emergency using a method that contradicts the hierarchy of control. However, the immediate superiors need to be briefed on the situation as soon as possible.
26. The number of workers who are under a manager’s supervision is referred to as their “span of control,” which is also sometimes referred to as their “span of management.” It refers to the number of people who report directly to a manager and are accountable for the boss’s actions.
27. The strategic goals of a company address all areas of the business, such as deciding which markets to operate in, what products and services to offer clients, and how to find and keep outstanding employees.
28. Setting strategic goals for the organisation and ensuring that all business operations contribute toward meeting those goals are the responsibilities of the management of the organisation.
29. Communication and the provision of plans that direct the activities ofthose in the organisation are required for the organisation to realise its strategic goals and put those goals into action.
30. Based on the nature of authority and its flow, the basic types of organisations may be classified as follows:
a) Centralised and decentralized organisation
b) Line and Staff Organisation
c) Functional Organisation
d) Committee Organisation
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31. A Centralised Business Structure is one in which key decisions, such as those on resource allocation, are made by a single individual, and that individual also provides the primary strategic direction for the company.
32. Organisations that are centralised have greater clarity in their decision-making processes, more efficient implementation of policies and projects, and greater control over the organisation’s overall strategic direction.
33. Centralised organisations provide less possibilities for staff members to respond, and they run a greater danger of being rigid as a result. These are two of the key disadvantages of centralised organisations.
34. A company with a decentralized organizational structure is one where mid-level and lower-level managers make most of the decisions, rather than the senior management team.
35. A compact book that contains information about the aims of the organisation, the authority and responsibilities of various positions, as well as the processes and procedures that are to be followed is called an organisation manual.
36. Information such as organisational goals and policies, job descriptions of important employees, organisational procedures, methods, and rules are all included in the organisation manual.
37. The organisation manual can be broken up into the following four sections:
a) Policy Manual
b) Operational Manual
c) Organisational Manual
d) Rules and Regulations Manual
38. The values, attitudes, beliefs, and behaviours that characterise and contribute to an organisation’s one-of-a kind social and emotional work environment are referred to as the organisation’s culture.
39. Organisational culture is referred to as corporate culture.
40. The organisational culture is one of the things that is the most difficult to change because it is unique to each company and is comprised of both written and unwritten rules that have been developed over the course of time.
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41. Types of Organisational Culture
a) The Clan Culture
b) The Adhocracy Culture
c) The Culture of the Market
d) The Hierarchy Culture
42. The Clan Culture has its foundation in working together. Members have a lot in common with one another and have the perception that they are part of a large family that is very involved in activities. The organisation is held together by its commitments and traditions, and leadership takes the form of mentoring for its members.
43. The Adhocracy Culture is characterised by a high level of energy and inventiveness. It is expected of leaders to be innovative and entrepreneurial, and employees are actively encouraged to take calculated risks. Experimentation, with an emphasis on individual ingenuity and freedom, is the primary means by which the organisation maintains its cohesion.
44. The Culture of the Market is founded upon the competitive nature of the market and the pursuit of tangible success. The focus is on achieving the goals, and the leaders are known to be strict and demanding. The organisation’s members are all working toward the same objective, which is to achieve an edge over all of their competitors. Market share and profitability are the primary factors that determine value.
45. The Hierarchy Culture is characterised by its emphasis on hierarchy and control. The atmosphere at work is very formal, and there are stringent protocols established by the institution to provide direction. A culture that places an emphasis on productivity and predictability is conducive to leadership because it requires organised coordination and monitoring.
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46. In the context of a specific job, function, or situation, the term “authority” refers to the formal, institutional, or legal power that gives the holder of that job, function, or position the ability to successfully carry out the responsibilities associated with that job, function, or position.
47. A subordinate’s duty is known as responsibility, and it is delegated to them by his or her superior.
48. A superior has the authority, or the right, to give orders and instructions to his subordinates in order to get things done. This right is known as “authority.”
49. The term “responsibility” refers to the responsibilities that are placed on a person because of the delegation of authority.
50. The various sources of authority are listed below:
a) Legitimate Authority
b) Coerciveness
c) Rewarding Authority
d) Expertise
e) Referent Authority
51. Legitimate Authority originates from the status quo and the cultural system of obligations that govern our rights and responsibilities. As a result, the “position” is accepted by the people as being “legitimate.”
52. Coerciveness is based on the ability of one person to instil fear in another person and is founded on the subordinate’s expectation that punishment will be met for not agreeing or complying with superior orders or beliefs. It is derived from the ability of one person to instil fear in another person.
53. Rewarding Authority results from the fact that some individuals possess the ability to reward you. Professors at universities have significant power to award you, as they can award or withhold higher grades.
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54. Expertise refers to the power that comes from having knowledge, abilities, and expertise in a particular field. Because superiors are in possession of this knowledge, subordinates strive to acquire it and carry out their instructions. Due to the high regard in which their specialised knowledge is held, professionals such as doctors, lawyers, and university professors can wield significant influence over the people around them.
55. Referent Authority: The recognition of a person’s faith as a leader who is held in high esteem, admiration, and often imitation by those who are subordinate to them is the foundation upon which referent power is built.
56. Some of characteristics of Authority are as follows:
a) Foundation for getting things done:
b) Legitimacy:
c) Decision making
d) Subjectivity in Implementation
57. Forms of Responsibility
a) Operating responsibility - Individuals are held accountable for their own actions in the workplace through the concept of “operating responsibility.” The person who is doing the work is the one who is responsible for, or obligated to fulfil, operating responsibility.
b) Ultimate Responsibility - • The manager is ultimately responsible for fulfilling his or her final task, which is to see to it that the work is carried out effectively by the staff members. The manager, who is ultimately responsible because he or she is the one who ensures that the work gets done, bears the ultimate accountability.
58. Productivity is measured by the amount of work that is successfully completed by personnel while adhering to the established timeline. When a company has high productivity, it suggests that they are hitting their production quotas, their business operations are running smoothly, and they are fulfilling all orders within the allotted time frame.
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59. Losses in productivity could be experienced by an organisation for the following reasons:
a) There are not enough people on the teams.
b) The workers either get disinterested in their work or become distracted.
c) Alterations in structure and practice made suddenly might be disorienting.
d) The difficulty of one’s task might be increased by factors such as unachievable deadlines and ineffective management.
60. Process management is a tool that managers use to guarantee that their teams are adhering to industry standards so that they may accomplish their task in a timely and effective manner.
61. The process of employing the individual who is the most competent for a position and then giving that job to the employee who is the most fit for the role is called role specification.
62. Innovation is the process by which businesses generate new ideas and grow their product and service offerings.
63. Teamwork requires members of an organisation to cooperate with one another toward the accomplishment of a certain objective.
64. The term “organisational change” refers to the actions that are taken by a company or business to modify a significant aspect of their organisation.
65. The transition of an organisation from one state to another is what is meant by the term “organisational change.”
66. The process of utilising change to bring about a successful resolution is referred to as Organisational Change Management.
67. Organisational Change Management involves three primary steps: planning, implementation, and follow-up.
68. There are three primary categories of organisational changes, which are as follows – Developmental Change; Changes during Transition: and Transformational changes.
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69. A methodical and systematic strategy for addressing the transition or change of an organisation’s objectives, procedures, or technologies, is referred to as “change management.”
70. The goal of change management is to put into action tactics that will bring about change, control change, and assist individuals in becoming accustomed to change.
71. The act of rejecting or battling against modifications or changes that affect the status quo is what we mean when we talk about change resistance. This resistance may show itself in a single worker or permeate the entire workplace.
72. A lack of readiness to adjust one’s behaviour in response to changing conditions can be defined as resistance to change. It can be done in an indirect or direct manner, organised or on a personal level.
73. Kurt Lewin (1890-1947) used the transition from solid to liquid to a block of ice to illustrate the concept of structural or organisational change.
74. Kurt Lewin model consists of three primary phases, which are Unfreeze, Change, and Refreeze, which are discussed in detail as under:
75. According to Lewin’s methodology, in Unfreeze stage, the process of transformation begins with the preparation of the change. This stage is the first in the process. This indicates that the organisation must be prepared not only for the possibility of change but also for the fact that change is both significant and essential.
76. At Change stage , the true transformation or change happens during this step of the process. This process can take some time to complete because people typically need some time to adjust to new happenings, advancements, and changes in their environment.
76. At Refreeze stage, the people in the company or organisation have shown that they are willing to accept, embrace, and work to put the change into effect. As a result, the firm or organisation starts returning to its previous state. Because of this, the stage is referred to as the recycling stage. This is the point in time when workers and processes begin to re-freeze, and things start getting back to the normal speed and routine that they were previously in.
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77. McKinsey 7-S Framework or Model was developed by consultants working for McKinsey & Company in the late 1970s, and it has seven stages, or phases, for managing change.
78. The Nudge Theory is helpful not only in locating and comprehending existing influences, but also in providing an explanation for those influences, with the goal of either removing them entirely or modifying them to the point where they allow for the achievement of positive outcomes.
79. The ADKAR model or theory of change is a goal-oriented tool or model that enables various change management teams to concentrate on the steps or activities that are directly related to the goals it wants to achieve. This makes it possible for change management to be more effective. The model produces cumulative and sequential results, both in terms of the goals achieved and the results that are defined by using the model.
80. ADKAR model basically stands for:
a) Consciousness - regarding the requirement and prerequisite for change
b) A strong desire to both be a part of and contribute to the process of change
c) Knowledge - how to effect this transformation
d) Capability - the ability to integrate change on a consistent basis
e) Reinforcement, both to maintain its current position and to add additional support later.
81. Bridges’ Transition Model The Bridges’ transition model was developed by William Bridges, an American author. The theory was brought to the attention of the general public after it was published in the book “Managing Transitions.”
82. Bridges’ Transition Model is distinguished by the fact that it concentrates on progression rather than modification and, as a result, remains static. Although there is often only a fine line between the two, it is essential to be aware of the distinction between change and transformation.
83. Change is something that occurs to people, even if they are unaware of it happening to them, even though on the one hand the transition is something that occurs from the inside out.
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84. Bridges’ Transition Model centres on three primary steps, which are described in the following order:
• End, give up and let go
• Neutral zone
• New beginning
85. Kubler-Ross Five Stage Model is also known as the grief model because it discusses the various emotional states and stages that people go through when they become aware that their time on earth is ending.
86. Stages in The Kubler-Ross model
a) Denial
b) Anger
c) Bargaining
d) Depression
e) Acceptance
87. The argument that different stages of the conflict process fundamentally alter the environment in which interactions between actors take place is what is meant by the concept of conflict dynamics at the core of a stage.
88. The process of resolving conflicts through conflict management aims to achieve a balance between minimising the potential for negative outcomes and maximising the potential for positive outcomes.
89. The goal of conflict management is to improve learning and group outcomes, such as an organization’s efficiency or performance in a given environment.
90. List of the top five strategies for conflict resolution:
a) Refrain from Ignoring the Conflict:
b) Explain the nature of the issue:
c) Organise a meeting between the various parties involved:
d) Identify a solution:
e) Maintain vigilance and follow up on the situation regarding the conflict:
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91. The process of forming relationships between the various participants in an enterprise is referred to as ‘‘organising.”
92. The authority and responsibilities of each party play a role in the formation of the relationships.
93. The formal organisation is supplemented by the informal organisation, which does not appear on the organisation chart, to assist in the accomplishment of organisational objectives in an effective and efficient manner.
94. Organisation requires the establishment of structural relationships between the various departments and the individuals who are employed there in order to achieve the objectives that have been set.
95. The distribution of responsibilities and the handing down of authority are the two primary concerns of an organization’s structure.
96. Differentiation provides customers in a niche market with a product or service that is tailored to their specific requirements.
97. Integration provides access to a wide range of products through a single entity. It enables them to gain an advantage over their competitors and cultivate a dedicated customer base.
98. For businesses to thrive and remain profitable in the current economic climate, it is essential for them to outperform their rivals in every facet of their customer interactions. To accomplish this goal, various businesses have opted to implement either differentiation or integration as their strategy.
99.The divisional hierarchy involves organising the activities into categories according to the product lines.
100. It is possible to delegate decision-making power to individuals at lower levels. This is known as Decentralisation.
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04.Staffing
01. Staffing encompasses activities such as personnel planning, procurement (also known as selection and placement), training and development, performance evaluation, and compensation of workers.
02. Salient Features of Staffing
a) Involvement with Human Beings
b) Distinct Managerial Function
c) A Necessary Activity at All Managerial Levels
d) Associated to Social Responsibility
e) Impact of Internal and External Environment
03. There are three primary facets of staffing, which are as follows:
a) Recruitment
b) Selection
c) Training
04. Recruitment is a positive process that seeks to attract a bigger number of people with ideal profiles to apply for positions that are empty in the business.
05. Selection is a procedure that eliminates candidates by carefully reviewing their applications and choosing those who are the best fit for the open position.
06. The selection process is different from the recruitment process in that it rejects applications.
07. Training is another constructive activity that improves the employees’ knowledge and abilities, as well as their capacity to do their jobs more effectively.
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08. staffing is an important managerial function and its significance can be further explained as under:
a) Recognizes Competent Staff
b) Enhancement of Overall Performance
c) Ongoing Capability for Survival and Development
d) The Optimal Employment of the Available Human Resources
e) Increases Job Satisfaction and Contributes to a Positive Morale
09. The process of determining the number of workers needed to fill positions in an organisational structure and assigning those positions to the appropriate individuals is referred to as “staffing.” It makes certain that only those individuals with the necessary skills are hired.
10. A method based on an open system is required for staffing. It is carried out within the company, which, in turn, is linked to the environment outside the company.
11. The total management system is related to the managerial function of staffing that is performed by managers.
12. Using the management inventory, a comparison is made between the needs for managers and the available talent. According to the findings of this investigation, both external and internal sources are used in the procedures of recruitment, selection, placement, promotion, and termination. A performance review, a strategy for one’s career, as well as training and development opportunities for managers are also vital components of staffing.
13. Staffing refers to the process of hiring individuals who are the most qualified for a job whereas recruiting is the process of finding potential applicants for ajob and encouraging them to apply for the vacant post.
14. Recruiting and staffing are two different processes but are often used interchangeably.
15. The process of recruitment and staffing is what constitutes the method by which companies find employees to fill open positions.
16. The process of filling open positions within a company with current staff members from that organisation is known as Internal Recruiting.
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17. When an organisation hires a recruiting firm to fill a vacant position, the organisation is responsible for paying an upfront fee to the recruiting firm. Up to the point that the post is filled, the company is responsible for locating potential candidates. In addition, the organisation commits to forming an exclusive partnership with the company. In other words, companies are unable to use multiple recruiting agencies for the purpose of filling the same vacancy.
18. Contingency Recruiting: This type of recruiting, like retained recruiting, requires the assistance of an outside firm. In contrast to retained recruiting, contingency hiring does not require an upfront payment. Instead, the recruitment company is only compensated when one of the candidates they represent is offered and accepts a position within an organisation.
19. Outplacement Recruiting: When it comes to recruitment, outplacement is a type of advantage that is often sponsored by employers and assists former employees in making the transition into new
20. Training is the process of increasing the skills, capacities, and knowledge of workers so that they are better suited to perform certain job duties. The training process shapes the way people think and ultimately leads to improved work performance from those individuals.
21. The benefits of training can be summed up as:
a) Boosts Employee Morale
b) Decreased requirement for supervision
c) Reduction in the number of accidents
d) Increased Promotion Chance
e) Increased productivity
22. Types of Training
On-the-job Training
Off-the-job Training
23. Off the job training is also known as vestibule training, which means that the employees are trained in a different place (which could be a vestibule consisting of a corridor, an entrance, a reception room, or something else) where the actual working conditions are mimicked.
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24. Knowledge Management is such an essential concept, that the term has even been given its own acronym, which is KM for short.
25. The processes of generating, exchanging, utilising, and managing information and knowledge inside an organisation are collectively referred to as “knowledge management.”
26. E-leaming, also known as learning management system, is what paves the way for a solid foundation of knowledge management.
27. SECI Model for Knowledge Management, was established by Nonaka and Takeuchi.
28. Learning Management Systems and the SECI Model
29. SECI stands for Socialisation; Externalization; Combination; Internalisation:
30. The initial component of knowledge management is known as Socialising. The use of a learning management system or eLearning in conjunction with socialisation is highly beneficial.
31. An employee’s work and contributions to the organisation are evaluated on a regular basis as part of a process called a performance evaluation.
32. The phrase “performance appraisal” refers to the periodic examination of an employee’s contribution to a company in terms of both job performance and overall contribution. An employee’s abilities, achievements, and growth—or lack thereof, depending on the results—are analysed during a performance assessment, which is also known as annual review, performance review or evaluation, or employee appraisal.
33. Types of Performance Appraisals
a) Self-evaluation
b) Peer assessment
c) 360-degree feedback
d) Negotiated appraisal
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34. Self-evaluation is when individual employees evaluate their own behaviour and performance on the job.
35. Peer assessment is a rating of an individual’s performance given by their workgroup or other co-workers.
36. 360-degree feedback assessment incorporates comments from the participant, as well as those of their supervisor and peers.
37. Negotiated appraisal is a more recent involves a mediator and aims to minimise the adversarial aspect of performance reviews by allowing the subject to present first.
38. Formal appraisal can be done using one ofthese four primary methods:
a) the evaluation of subordinates by a superior;
b) the evaluation of subordinates by a group of superiors;
c) the evaluation of a colleague by a group of peers; and
d) the evaluation of bosses by subordinates.
39. Methods of Performance Appraisal can be divided into two different categories.
a) Past-Oriented Methods
b) Future-Oriented Methods
40. Past-Oriented Methods
Rating Scales; Trait Analysis; Forced Choice Method; Forced Distribution Method; Critical Incidents Method; Confidential Records; Pen portrait:
41. Rating Scales: Rating scales consists of several numerical scales representing job related performance criterions such as dependability, initiative, output, attendance, attitude, etc. Each scale ranges from excellent to poor. The total numerical scores are computed and final conclusions are derived.
42. Trait Analysis: Under this method, checklist of statements of traits of employee in the form of Yes or No based questions is prepared. Here the Rater only does the reporting or checking and HR department does the actual evaluation.
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43. Forced Choice Method: The series of statements arranged in the blocks of two or more are given and the Rater indicates which statement is true or false. The Rater is forced to make a choice. HR department does actual assessment.
44. Forced Distribution Method: Here employees are clustered around a high point on a rating scale. Rater is compelled to distribute the employees on all points on the scale. It is assumed that the performance is conformed to normal distribution. Assumption of normal distribution, unrealistic, errors of central tendency may occur.
45. Critical Incidents Method: The approach is focused on certain critical behaviours of employees that makes all the difference in the performance. Supervisors as and when they occur record such incidents.
46. Confidential Records: Mostly used by government departments, and in older organisations where the concept of self-assessment is not encouraged. Here the report is given in the form of Annual Confidential Report (ACR) and may record ratings with respect to following items; attendance, self-expression, team work, leadership, initiative, technical ability, reasoning ability, originality and resourcefulness, etc. The system is highly secretive and confidential. Feedback to the Assesse is given only in case of an adverse entry. Rather negative in impact as the ratings are highly subjective and can be manipulated to suit an occasion.
47. Pen portrait: The assessor pictures in writing about the assesse, regarding his qualities and performance as well as his potential. Armies use this method in evaluating cadets.
48. Future-Oriented Methods
Management by Objectives; Assessment Centre Approach Method; Behaviourally Anchored Rating Scales (BARS);
49. Behaviourally Anchored Rating Scales (BARS) is a modem appraisal technique which supports the claim that it provides better, more equitable appraisals as compared to other techniques.
50. Key Result Areas are set of activities derived out of short term objectives. KRAs refer to general areas of outcomes or outputs for which the department’s role is responsible.
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51. The Individual Performance and Development Plan has two component parts, the Performance Plan and its related Individual Development Plan.
52. The Performance Plan is constructed by the manager and employee together, focusing on priority-setting for the performance management cycle and, working co-operatively through a four-step process:
a) Agreeing upon Key Results Areas
b) Agreeing upon Performance Objectives
c) Agreeing upon Key Performance Indicators and their associated Performance Targets
d) Agreeing upon Action Plans
53. KRAs refer to general areas of outcomes or outputs for which the sector/department is responsible.
54. The purpose of human resource development is to enhance the efficiency of individuals, groups, and organisations through the coordinated implementation of various training, organisation, and career advancement initiatives.
55. Job shadowing is a type of on-the-job training that allows an interested employee to follow and closely observe another employee performing the role. This type of learning is usually used to onboard new employees into an organization or into a new role.
56. The term “industrial relations” refers to the interaction that exists between workers and management, which can either directly or indirectly be traced back to the relationship between unions and employers.
57. The term ‘Industrial Relations’ explains the relationship between employees and management which stems directly or indirectly from union-employer relationship.
58. Industrial relations are the relationships between employees and employers within the organizational settings. The field of industrial relations looks at the relationship between management and workers, particularly groups of workers represented by a union.
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59. Industrial relations are basically the interactions between employers, employees and the government, and the institutions and associations through which such interactions are mediated.
60. Managing change means managing the conversation between the people leading the change effort and those who are expected to implement the new strategies, managing the organizational context in which change can occur, and managing the emotional connections that are essential for any transformation.
61. Management of change involves managing the interaction between the people who are leading the change effort and those who are expected to implement the new strategies.
62. Management of change involves managing the organisational context in which changes can take place and managing the emotional bonds that are essential for any transition.
63. John Kotter (1996), a Harvard Business School Professor, in his book “Leading Change”, introduced 8 Step Model of Change.
64. The 8 steps in the process of change include: creating a sense of urgency, forming powerful guiding coalitions, developing a vision and a strategy, communicating the vision, removing obstacles and empowering employees for action, creating short-term wins, consolidating gains and strengthening change by anchoring change in the culture.
65. A career strategy is any behavior, activity, or experience designed to help a person meet career goals. A career strategy represents a conscious choice by an individual as to the type of investment he or she is willing to make in attempting to reach career objectives.
66. A career development plan (CDP) is a list of long and short-term goals that employees set for themselves in either their current role or pre-emptively for their future job.
67. The term “stress management” refers to a wide range of treatments and psychotherapies that are aimed at regulating the degree of stress experienced by a person, particularly the level of chronic stress, typically with the intention and the goal of enhancing day-to-day functioning.
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68. Companies and their human resources departments are open systems, and as such they are susceptible to the external environment in which they function.
69. Aptitude Test is most helpful in determining an individual’s potential to pick up new abilities quickly and easily.
70. Relocations is a good source for filling the vacant positions with people from departments that already have too many workers.
71. A manager’s propensity to make use of knowledge about subordinates in ways that lead to incorrect perceptions of those subordinates is referred to as bias.
72. For resolving Skill gaps training proves to be the most successful method.
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05. Directing
01. Directing is an important function as people, working in the organisation, are guided, motivated, counselled, supervised, and led towards the achievement of organisation’s goals through the practice of directing, which can be thought of as either a process or an instruction of tactics.
02. It is called a directing process when the process lasts throughout the entirety of the company’s existence, meaning that it is an ongoing part of the continuous managerial process.
03. Primary characteristics of the process of directing:
a) The initiator of action
b) All-encompassing function
c) Constantly occurring activity
d) Descending order of hierarchical structure
e) The human factor
04. Directing has following four main elements:
a) Leadership
b) Motivation
c) Communication
d) Supervision
05. The term “leadership” refers to both a set of behaviours and a set of attributes that can be acquired through training and development respectively.
06. Leadership is the process of inspiring other people to work toward a common goal and organising their resources to make that objective a reality.
07. The ability to mould the actions of others is essential to effective leadership.
08. Leadership can be seen as the capacity to exert influence over a group in order to bring about the desired outcome.
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09. It is necessary to have leaders in order to generate visions of the future and to motivate people of an organisation to accomplish those ambitions.
10. Traits Attributable to Effective Leaders
a) It is a procedure involving multiple people in which a manager influences and directs employees toward the accomplishment of predetermined objectives.
b) It is a reference to some of the characteristics that are inherent in a person, such as their intelligence, maturity level, and personality.
c) It is a procedure that involves more than one person interacting with each other and combining their efforts.
d) A leader is engaging in the activity of attempting to shape the behaviour of the group in order to facilitate the accomplishment of the company’s aim.
e) Leadership is dependent on one’s position. There is no single model of leadership that is superior to all others. It is entirely dependent on how the circumstance is managed.
11. Leadership is important as it …
a) Begins or starts the action:
b) Coordinates efforts:
c) Provides motivation:
d) Helps maintain equilibrium:
e) Adapts to changing circumstances:
f) Makes effective use of available resources:
12. Functions and responsibilities of a leader are as follows:
a) Direction at all levels:
b) Representative of the Organisation:
c) Helping Integration and Reconciliation of Personal Goals with Business Goals:
d) Garners support:
e) Acts as Friend, Philosopher and Guide:
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13. A leadership model that is grounded in theory and serves as a theoretical framework for how to best manage personnel. This hints, in general, at a similar approach to responding to the demands of employees and the business, an approach that has been demonstrated to be useful in that model.
14. One way to characterise leadership models is, as guides that indicate various leadership behaviours that should be applied in a particular context or place.
15. The leadership model is utilised in order to provide a helpful methodology and structure for defining management practices that are suitable to the work style and personality of the individual.
16. Authoritarian Leadership - A leader has the ability to set results and enforce expectations through the use of authoritarian leadership methods.
17. Participative Leadership - The democratic ideal can be traced back to the origins of the participative leadership style.
18. Delegative leadership is a representative leadership style that focuses on delegating initiative to team members and the style is also known as “laissez-faire leadership.” This strategy has the potential to be successful provided the members of the team are knowledgeable, willing to accept responsibility, and like the opportunity to work on their own.
19. Transactional Leadership - Transactions between a leader and his followers, including incentives, admonition, and other commutations, are utilised by the transactional leadership model to accomplish the goal of getting the work done. The leader makes sure that everyone is aware of the objectives, and everyone on the team is aware of how they will be rewarded for meeting the requirements. This type of giving and taking is more concerned with adhering to existing routines and procedures in an accomplished manner, as opposed to creating any radical changes inside an organisation.
20. Transformational Leadership - In this paradigm, the leader inspires his or her followers by providing them with a clear vision, and then the leader encourages and empowers the followers to work toward achieving the goal. The leader is also responsible for serving as an example of the vision.
21. The word “motivation” is derived from the Latin word “motive,” which can be translated as “necessity,” “incline,” or “drive” within a person. People are motivated to take action so that the goal can be achieved.
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22. It is possible that psychological factors are what drives people’s behaviour during the course of the task they are trying to accomplish.
23. It is common practice to classify the various forms of motivation into two categories - extrinsic and intrinsic:
24. Extrinsic Motivation (Motivation Derived from Outside Sources):
Extrinsic motivation is defined as a motivation to participate in an activity based on meeting an external goal, garnering praise and approval, winning a competition, or receiving an award or payment.
25. Intrinsic Motivations (Motivations That Come from Within) refers to actions that are driven by internal rewards
26. The following are the three primary components of motivation:
a) Conformational Changes is when the choice is made to carry out a behaviour, such as enrolling in a science course.
b) Perseverance is a persistent effort in the direction of a goal, in spite of the presence of obstacles.
c) Intensity is a visible manifestation of the dedication and enthusiasm with which one pursues a goal.
27. The ERG model was established by Clayton Alderfer, who took Maslow’s Hierarchy of Needs and turned it into a three-factor model of what motivates people.
28. Existence, Relatedness, and Development are the three distinct types of needs that are represented by the letters E, R, and G in this paradigm.
29. Existence, which essentially refers to both a person’s physical and mental well-being, is the most tangible and motivating of Alderfer’s three requirements, and it is also the need that comes first.
The need for relatedness, a sense of community, and a healthy relationship with oneself are the next levels of importance.
The need for growth, which essentially refers to self-development, fulfilment, and the feeling of realising your potential, is the one of Alderfer’s wants in the ERG model that is the least tangible, but it is still very important.
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30. According to Herzberg’s theory of motivation, the two factors known as the “Hygiene factor” and the “Motivating factor” have an impact on one’s level of motivation in the workplace. If the hygiene factors are not present, the employee will put in less effort into their work. When present, motivation factors will inspire an employee to put forth their best effort in their work.
31. The following factors are considered to be motivational factors:
a) A Sense of Accomplishment
b) Recognition
c) The nature of the task itself
d) Responsibility
e) Promotion
f) Growth
32. The following are examples of factors related to hygiene:
a) The policies of the Company
b) Supervision
c) Relationships
d) Working Conditions
e) Compensation Policies
t) Status
33. David McClelland, an American psychologist, was the one who first proposed what is now known as the “McClelland Needs Theory.”
34. McClelland held the belief that an individual’s unique needs are developed over the course of their lifetime and are shaped by the various experiences they have throughout their lives.
35. McClelland’s Needs Theory is also referred to as the Three Need theory and the Learned Needs Theory from time to time.
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36. McClelland has recognised three fundamentally important wants that motivate people:
The Need for Power
The Need for Affiliation
The Need for Achievement.
37. People who have a strong need for affiliation gain pleasure from being loved by everyone and have a tendency to avoid the anguish of being rejected. This trait is denoted by the acronym “n-affiliation.”
38. McClelland discovered that certain individuals have a strong need for achievement (also known as a “n-ach”) in their lives.
39. The Porter and Lawler theory of motivation is predicated on the supposition that receiving rewards can lead to a sense of fulfilment, and that sometimes performing well can result in receiving rewards.
40. Porter and Lawler contend that performance is not necessarily a direct result of being satisfied. Instead, the opposite is true because once people have achieved their goals of satisfaction, they are more likely to become complacent. On the other hand, if the reward system is successful, performance can result in a feeling of satisfaction.
41. John S. Adams, a behavioural psychologist, was the first person to develop Equity Theory in the early 1960s.
42. Equity Theory deals with defining and measuring the relational satisfaction of employees.
43. Adams recommends that workers try to strike a balance between what they give an organisation and what they receive, and that they base their contentment with their own amount on their perceptions of an equal amount among their co-workers.
44. The concept of equity is based on the idea that people’s actions and motivations are directed by a sense of fairness, and that disparities in this sense of fairness in the workplace motivate people to work toward finding a solution to the problem.
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45. Vroom’s Expectancy Theory of Motivation, developed by Victor Vroom, is an example of a process explanation of motivation. It states that an individual’s expectations about the future have an effect on the individual’s level of motivation.
46. According to Vroom, the specific factors that determine an individual’s level of motivation are the degree to which they place a high value on any reward that is associated with a particular action (known as “Value”), the degree to which they believe that they will be able to achieve positive results as a direct result of the effort that they put into something (known as “Expectancy”), and the degree to which they believe that achieving positive results will result in a reward (known as “Belief (Instrumentality).
47. Incentives can be either intrinsic or extrinsic in nature. Things like money and promotions are examples of extrinsic motives. Intrinsic motivations come from within an individual.
48. Things like a sense of accomplishment and fulfilment are examples of intrinsic motivations. These are things that come from within an individual.
M=V*I*E
49. Implications of Vroom’s concept for individuals:
According to Vroom, an individual’s level of motivation is the result of various factors, including the following:
• Valence: the extent to which individuals place importance on the opportunities for rewards that are related with the specific results or actions in question
• Expectancy: This refers to the degree to which individuals believe that the greater effort they put in will assist them in achieving the desired effects of activities, and
• Instrumentality: It refers to the degree to which individuals have faith that the rewards will materialise for them if they attain the desired outcomes or behaviours.
When viewed from an individual’s perspective, this indicates that a lack of motivation may be present if any one of these variables is absent.
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50. Implications of Vroom’s Theory for Leaders and Organisations:
The Vroom model serves to make it abundantly evident that in order for leaders or organisations to:
a) Make available to people the kinds of rewards they care about:
b) Individuals should be given goals that are within their reach:
c) Make sure to give out the incentives that were promised when they were earned:
51. Self Determination Theory -
Self-determination is a belief that each person possesses the capacity to choose their own path in life and take responsibility for managing their own affairs.
In self-determination theory, one of the most important concepts is that of intrinsic motivation, which refers to the act of engaging in behaviours for the sake of the rewards that result from those behaviours.
52. The work of psychologists Edward Deci and Richard Ryan was the foundation for the development of Self Determination Theory.
53. Deci and Ryan first presented their concepts in their book titled Self-Determination and Intrinsic Motivation in Human Behaviour, which was published in 1985. They came up with a theory about what motivates people, and it suggested that people are driven by a desire to improve themselves and find satisfaction in their lives.
54. Communication refers to the process of providing an unmistakable answer to the agonising division that exists between oneself and others, as well as between one’s private and public spheres of experience.
55. Communication refers, in its most fundamental sense, to the act of conveying meaning from one individual to another by using a shared set of symbols.
56. Lasswell's model analyzes communication in terms of five basic questions: "Who", "Says What", "In What Channel", "To Whom", and "With What Effect". These questions refer to the most salient components of the process of communication.
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57. In the late 1940s, two American mathematicians named Claude Shannon and Warren Weaver came up with one of the most fruitful schematic models of communication systems, which they proposed as an answer to Lasswell’s question. This answer was proposed as an attempt to find an answer to Lasswell’s question.
58. Two of the most fundamental tenets of communication, namely that it is irreversible and that active listening should always be practised, are essential to the success of any business.
59. The act of transferring information from one location, person, or group to another is what we mean when we talk about communication. There is always (at least) one sender involved in a communication.
60. When there is a breakdown in communication, disorder and confusion are brought into a situation, and the likelihood of failure increases dramatically.
61. Communication is only successful when both relational partners involved in the communication process have an equivalent understanding of the information being exchanged. Failure of organisations is frequently attributable to inefficient communication.
62. In its most basic form, communication can be broken down into five levels:
a) Communication Not Directed Toward Me
b) Communication Between Individuals
c) Intrapersonal Communication
d) Organisational Communication
e) The Field of Mass Communication
63. Organisational communication is a broad field that includes all forms of communication that allow businesses, government agencies, and non-profit organisations to function, grow, connect with stakeholders, and contribute to society.
64. Supervision is a Latin Word. Super means ‘from the above’ and vision means ‘to see’. In normal sense of the term, supervision means overseeing the activities of others.
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65. Supervision is the process of interaction, guidance and control of subordinates by meeting them regularly about the performance of their work.
66. Supervision is intended at ensuring that the subordinates work according to the plans and policies of the organization.
67. Supervision may be required by legislation, regulation, inspection requirements, or the requirements of the organisational policies and needs.
68. A supervisor plays two important roles:
a) Supervisor communicates the plans, policies, decisions and strategies of management to the subordinates.
b) A supervisor also acts as a guide to the subordinates.
69. Requisite Qualities of an Effective Supervisor
a) Leadership qualities
b) Knowledge and Skills
c) Personal traits
d) Degree of Supervision
e) Promoting Cohesiveness of the group
f) Rapport with Superiors
70. Supervision is primarily concerned with overseeing or watching the performance of subordinates.
71. The importance of supervision can be explained as follows:
a) Issue of Orders and Instructions
b) Planning and Organizing the Work
c) Proper Assignment of Work
d) Better Utilisation of Resources
e) Improved Motivation, Discipline, and group cohesiveness
72. The process of supervision and guidance of supervisor results in better discipline of the subordinates.
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73. A supervisor is a representative of the management when he deals with his subordinates.
74. The top management of an organisation is responsible for carrying out the management function of direction.
75. Direction is comprised of the procedures and methods that are utilised in the process of delivering instructions and ensuring that operations are carried out in accordance with the initial plan.
76. The internal condition that activates conduct and provides it direction is referred to as motivation.
77. Motivation energises and guides behaviour that is goal-oriented.
78. The process of an individual exerting influence over the beliefs, attitudes, and actions of other people is referred to as leadership.
79. Leaders are responsible for pointing the rest of the group in the right direction and illuminating the path that lies ahead.
80. Leaders assist the team in visualising what it is capable of doing and urge and excite the entire team to perform to the level that is commensurate with its genuine potential.
81. Without leadership and direction, a group will deteriorate into members who are unable to perform their duties effectively. Because of this, the act of leadership is recognised as a crucial distinction in the world of business. To be more productive as an individual, you absolutely need to be able to work well with others and must possess strong leadership characteristics.
82. Participative leadership style is an indication that the leader has confidence in the skills of his or her followers.
83. The factors that an individual values and strives to accomplish are depending on the anticipation that a higher level of performance will be accomplished successfully as a result of increased effort.
84. A leadership style that emphasises direction allows for the least amount of input or feedback from the workforce.
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06. Controlling
01. Controlling is the last function of the management process
02. implemented to check whether or not certain criteria are being met.
03. Controlling Process entails gathering information about a system, process, person, or group of people in a thoughtful manner, in order to arrive at decisions that are necessary regarding each of these entities.
04. When something is controlled, it is ensured that the activities within an organisation are carried out in accordance with the plans.
05. The controlling function determines the degree to which actual performance varies from predetermined benchmarks.
06. Broadly, the control management can be of 3 types, based on the timing of the control:
Feedback control
Proactive control
Concurrent control
07. Feedback control: These controls are based on the feedback received after the activity has taken place. So, the corrective action can be taken only for carrying out similar activity in future.
08. Proactive control: These are future-directed controls which anticipate problems well in advance and the corrective action is taken accordingly.
09. Concurrent control: These controls are based on the real-time engagement of the controller as the activity is being carried out. So, the corrective action can be taken simultaneously with carrying out the activity, to take care of any deficiencies observed.
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10. The following procedures are included in the fundamental control process:
a) The process of establishing goals and standards:
b) Comparing the actual performance to the predetermined goals and criteria:
c) Taking steps to make necessary corrections:
d) Continuing to monitor the effects of corrective actions:
11. The processes of planning and controlling are inextricably linked to one another. The objectives of the organisation are determined through the planning process, and the controlling process ensures that they are met.
12. The planning phase determines the control process, and the controlling phase lays a solid foundation for the planning phase.
13. Control is an aspect of planning as well as a projection of planning. Whereas planning determines the course to be taken, control monitors deviations from the course and then takes action to either return to the originally planned course or to a course that is more suitable.
14. Planning is the foundation for control because it provides the entire spectrum on which control functions are based. This makes planning the basis for control.
15. The relationship between planning and control …..>
a) The Planning Stage is the Originator of Control:
b) Controls help Planning Sustain for Long-Term:
c) The control process supplies information that can be used for planning:
d) Planning and controlling are interconnected in the following ways:
e) Planning and control involve looking into the future:
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16. Control techniques give managers access to the specific information as well as the volume of data they need to measure and monitor performance.
17. Controlling techniques are the tools that are used to establish control over business activities, monitor those activities, and take any necessary corrective actions.
18. The two broad categories under which techniques of controlling fall are: Traditional Techniques and Modem Techniques.
19. Personal Observation is also known as On-the-Spot Observation and Direct Observation.
20. Break-even Analysis control method illustrates the relationship between cost and volume at varying levels of production output. The Cost, Volume, and Profit analysis is another name for this approach.
21. Break-even Analysis forecasts the profits and losses that will result from changes in the amount of output that is produced.
22. The break-even point refers to the point at which the purchase price and the selling price are equal to one another.
23. Break-even Point Formula:
Fixed Cost
Break Even Point = --------------------
Price - Variable Cost
24. Total cost involves two types of costs, i.e. Fixed Costs and Variable Costs. Profits and Losses are affected by the proportional changes in both.
25. Under the Break-Even Analysis technique, the evaluation is based on - Break-even Point ; Angle of Incidence ; Contribution Margin ; Margin of Safety
26. Information is gathered by the manager so that performance can be evaluated across functional areas.
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27. The information that is gathered is then utilised for the purpose of comparison.
28. Budgetary Control begins with the planning of the fundamental operations and continues with comparisons of that planning to the performance that actually occurred.
29. Comparing and analysing the actual performance with the planned performance is an integral part of the budgeting process.
30. Return on Investment, abbreviated as “ROI,” refers to the profit made from capital that has been invested. In order to achieve greater financial control over the company, it is analysed. The Du-Pont Method of financial analysis is another name for this methodology.
31. Calculating the rate of return on investment (ROI) allows us to measure the return that was generated. Using this rate, one can better evaluate the company’s current financial situation.
32. ROI Formula:
Net Income Sales
Return on Investment =-------------- x ----------------------
Sales Total Investment
33. According to the Du-Pont method, there are two ways in which we can increase our return on investment:
a) By increasing the volume of sales in a manner that is proportionally greater than the overall investment.
b) By lowering the total investment while maintaining the same level of sales volume.
Therefore, we can interpret it as the utilisation of committed capital for the purpose of producing returns.
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34. Responsibility Accounting is a method of accounting in which the amount of responsibility placed on the individual employee is taken into consideration.
35. There are four categories of Responsibility Centres:
a) Revenue Centre (b) Cost Centre (c) Profit Centre (d) Investment Centre
36. The acronym CPM stands for the Critical Path Method, while PERT refers to the Program Evaluation and Review Technique.
37. Project Evaluation and Review Technique (PERT) is a procedure through which activities of a project are represented in its appropriate sequence and timing. It is a scheduling technique used to schedule, organize and integrate tasks within a project.
38. The critical path method (CPM) is a technique where you identify tasks that are necessary for project completion and determine scheduling flexibilities. A critical path in project management is the longest sequence of activities that must be finished on time in order for the entire project to be complete.
39. The Management Information System, or MIS, is essentially responsible for providing information that facilitates the making of sound decisions.
40. MIS is comprised of two primary parts - The Collection of Data and The Management of Data
41. Auditing, whether it be Management Audit or Internal Audit, is the process of examining how a company uses its resources.
42. The objectives of Information Technology Controls (IT control) relate to the confidentiality, integrity, and availability of data, as well as the general management of the enterprise’s IT function as a whole.
43. The term “physical access” refers to an unauthorised third party reaching into your database.
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44. SDLA means System Development Life Cycle. It is also essential that it be controlled. The standardisation of the system development life cycle is one way that this car. be accomplished.
45. BCP Controls Techniques - The abbreviation “BCP” refers to the ‘Business Continuity Process.” Maintaining control of it won’t be impossible if you have a sufficient number of backups and a solid recovery strategy in place in case the system is destroyed.
46. IT General Controls (ITGC) - Controls over the Information Technology (IT) environment, computer operations, access to programmes and data, as well as programme development and programme changes, are all included in ITGC.
47. The IT Governance Council (ITGC) serves as the structure’s primary pillar. They support the assertion that systems operate as intended and that output is reliable, in addition to helping to ensure the accuracy of the data that is produced by information technology systems.
48. IT Application Controls - Transaction processing controls, also known as “input-processing output” controls, are what are meant when someone talks about IT application controls.
49. The controls of an IT application or programme are fully automated, which means that they are performed automatically by the systems. This is done to ensure that the data are processed correctly and completely from the time they are input until they are output.
50. Checks for completeness are controls that ensure all records have been processed from the beginning to the end of the procedure.
51. Validity checks are controls that ensure only valid data is input or processed. These checks look for errors in the data.
52. Authentication refers to the controls within the application system that offer a method for user authentication.
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53. Authorization refers to the controls that ensure the application system is only accessible to business users who have been pre-approved.
54. Input controls are controls that guarantee the data integrity of information that is fed into the application system from upstream sources.
55. Forensic controls, also known as controls that ensure data is correct mathematically and scientifically based on inputs and outputs
56. The Chief Information Officer (CIO) or the Chief Information Security Officer (CISO) of an organisation is the one who is accountable for the safety, accuracy, and dependability of the systems that manage and report the company’s data, including its financial data.
57. Financial accounting and enterprise resource planning systems are integrated in the initiating, authorising, processing, and reporting of financial data.
58. The COBIT Framework, also known as the Control Objectives for Information Technology Framework, is a framework that has seen widespread adoption and was developed by the IT Governance Institute. This framework defines a variety of ITGC and application control objectives as well as recommended evaluation approaches.
59. The Chief Information Officer (CIO) of an organisation is typically the person in charge of the IT department. This individual is accountable for ensuring that efficient information technology controls are utilised.
60. COBIT addresses governance problems by combining the various relevant governance components into governance and management objectives that can be managed to the necessary capability levels.
61. The Committee of Sponsoring Organizations of the Tread way Commission (COSO) identifies five components of internal control:
a) control environment, b) risk assessment, c) control activities,
d) information and communication e) monitoring,
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62. COBIT offers comparable and detailed guidance for information technology, while the interrelated Vai IT focuses on higher-level IT governance and value-for-money concerns.
63. The five aspects of COSO can be represented mentally as the horizontal layers of a three-dimensional cube, and the objective domains of COBIT can be thought of as applying both to each one separately and to the whole.
64. The four COBIT major domains are:
a) Planning and organising
b) Acquiring and implementing
c) Delivering and supporting
d) Monitoring and evaluating
65. Keeping everything under control is an essential function of management.
66. Control and freedom are not mutually exclusive concepts.
67. Both planning and managing are necessary to ensure that operations go on smoothly.
68. The efficiency of controlling is directly proportional to the efficacy of planning.
69. The concept of control can be applied to practically every goal-oriented activity that seeks to achieve success.
70. Control is necessary in many aspects of an organisation, including its policies, its labour requirements, its capital expenditures, its production, and its wages and salaries. In a nutshell, control is necessary for any endeavour that is focused on achieving a specific objective.
71. Actual performance will need to be compared with the budgets in order to determine whether or not the goals have been achieved.
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72. The act of bringing together the facilities and persons necessary for collecting and processing information that is required by the Top Management is referred to as Management Information System.
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Index
Advanced Business & Financial Management (ABFM)
Module B - Advanced Concepts of Financial Management
Chapter No
Topic
01
Sources of Finance and Financial Strategies
02
Financial and Operating Leverages
03
Capital Investment Decisions
04
Capital Budgeting for International Project Investment Decisions
05
Adjustment of Risk and Uncertainty in Capital Budgeting Decision
06
Decision Making
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01 Sources of Finance and Financial Strategies
01. The finance to start the business is generally provided by the persons who moot the idea of business. These persons are known as owners or promoters. Since the owners are going to stay with the project, their finance is long term finance.
02. If the project is too big and the promoters do not have enough money, normally long-term borrowing is preferred.
03. Since processing of term loans takes time, promoters also go in for Bridge Finance which is a temporary funding to fill the time gap between the fund requirement and the actual release by the long-term lenders.
04. Term finance is provided by banks and financial institutions.
05. Debt Equity Ratio means how much ideally promoters should contribute as equity and how much they should borrow for long term. This depends on various factors but the general and safe norm is if equity is Rs. 100, one can safely borrow up to Rs. 200.
06. The entire requirement of long-term funds will depend on the size and capital requirement of the project.
07. The finance required for running a business is called working capital finance and is based on the gap between the current assets and current liabilities.
08. Current assets are those which are created and extinguished in an operational cycle.
09. An operational cycle is the time or period in which cash, after going through various forms is converted back into cash.
10. The gap between Current Assets and the Current Liabilities is the working capital gap which can be financed by a bank.
11. Financial strategies are those permutations and combinations which a business adopts or avails to satisfy its funds requirements, whether these are long-term or short-term.
12. Strategies are so worked out as to maximise the advantages and minimise the cost of funds.
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13. A clean finance is the costliest, because the lender who has no assets to fall upon in case of a default and runs higher risks which he would cover by charging higher rate of interest.
14. Equity is a clean finance and although it appears to be cheap, the cost of servicing is very high because the equity shareholders will expect good returns over the years in the form of dividend, which is always distributed after the company pays its taxes. They also expect increase in the market price of shares.
15. Capital generally means the amount invested for establishing a business which is owned by the promoter.
16. In accounting terms, Capital means the amount remaining after selling all the assets and paying off all the liabilities.
17. Capital represents the money the owner brought in at the time of setting up the business and the profits he earned but did not take away over a period of time.
18. A corporate has hordes of investors who come from various walks of life and who may neither know one another nor may be related to each other.
19. Equity means a quality of being fair or impartial, something that is fair and just.
20. Equity capital is divided into units called Equity Shares. Each unit has the same value called nominal value.
21. Equity holder has two types of financial rights;
the right to income (dividend) and the right to retaining surplus assets in case of liquidation.
22. All subscribers to the Equity Shares are governed by a common document called Memorandum and Articles of Association
23. If the company is listed on a stock exchange, the liquidity of the Equity Shares increases since the holder can sell it to anyone through the exchange.
24. Equity Shares can be priced by the issuer at the nominal value or at a premium or discount subject to extant regulations and guidelines.
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25. Equity Capital can be enhanced, reduced, subdivided, bought back or issued free of cost.
26. Equity Shareholder can also pledge and borrow against the Shares because an equity share is a marketable and valuable security.
27. Authorised Capital or Nominal Capital represents the maximum amount of capital that the company is authorised to issue which can be in any instalments as the Board decides. This is prescribed by the Memorandum and Articles of Association of the Company and in case of any change, the company has to go to the shareholders as prescribed in the Act.
28. Issued Share Capital is the part of authorised capital which is issued to public for subscription. This includes shares issued for cash and for consideration other than cash to promoters of a company or other people.
29. Subscribed Share Capital is the portion of the issued share capital that is subscribed to by the public, i.e., applied for and allotted by the company. It also includes the face value of the company’s shares issued for consideration other than cash. It is possible that all the shareholders, who have been called upon to subscribe to the capital, may not respond and therefore the actual subscribed capital may be less than the called up one.
30. Called-up Share Capital is that part of the Issued Capital that the company has called up from the shareholders. The call can be one or more subject to the extant regulations and need of funds by the company.
31. Paid up Share Capital is the amount of money a company has received from shareholders in exchange of shares. However, even after subscription, some may skip or delay the actual payment and, in such case, the paid-un capital can still be lesser than the subscribed capital.
32. Calls in Arrears are a part of the called up or subscribed capital which the company can follow up and rightfully collect when the shareholders fail to pay the full or part amount.
33. Unpaid Share Capital is, as the name suggests, the amount finally determined as unpaid for which the management can take suitable decision.
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34. Forfeited Shares are that part of the subscribed capital which is not fully paid as required and as a final resort, the company forfeits the amount so that it can be reissued as the Board decides, subject to the regulations.
35. Except owners or promoters, no one would be able to take the inherent risk.
36. Equity is a natural choice and the first option to raise funds.
37. Depending of the size of the project, the equity portion is determined.
38. As a measure of financial prudence, no company can or would like to distribute the entire earnings after tax to the shareholders.
39. Part of the Profit After Tax (PAT) is retained in the company, which is usually reflected in the general reserve. These retained profits are internal accruals of the company. These arise out of the cash profits i.e. (1) PAT, (2) non-cash profits charged to the Profit & Loss account, in the form of provisions or reserves and (3) depreciation charged to the Profit & Loss account.
40. If the company has preference shares on which dividend is cashed out, the same will reduce the retained earnings.
41. Depreciation is part of internal accruals as it results in increasing the cash balance available to the company even though it does not affect the general reserves and, therefore, cannot be used for declaring dividend and issue of bonus shares.
42. Internal accruals include reserves which are created out of current profits but post tax. These reserves such as dividend equalisation reserve, redemption reserve fund and other mandatory reserves under certain statutory provisions, as may be applicable, cannot be utilised as free or general reserves until transferred to free reserves after the expiry period or before fulfilment of the laid down conditions as the case may be.
43. Internal accruals or the ploughed back profits belong to the equity holders and become equity if these are converted in to bonus shares for which regulations exist.
44.Preference Capital is that part of the capital which provides lesser risk to the investor compared to that which is taken by the equity investors. The holder gets a preference with respect to dividend as well as payment is case of liquidation.
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45. Equity is a common stock and Preference share is preferred stock.
46. There are cumulative preference shares where the dividend is guaranteed. In other words, if in a year the company does not have enough profits to declare dividend, it is accumulated to the credit of the shareholders and paid when, in a subsequent year, the distributable surplus is available.
47. Redeemable Preference Shares are those which get repaid as per the terms of issue. Under the current provisions of the Companies Act, 2013, companies limited by shares are prohibited from issuing Preference Shares which are not redeemable. All the preference shares are required to be redeemed within a period not exceeding 20 years. Redemption has to be made out of profits or out of the proceeds of fresh share issue for such redemption purpose. However, in case of banks, perpetual debt instruments can be issued.
48. Preference shareholders have a limited right to participate in voting only on some of the resolutions as specified in the Companies Act, 2013.
49. Where dividend on preference shares has not been paid for two years or more, such shareholders get a right to vote on all company resolutions.
50. No security is provided to the preference shareholder unlike in case of debentures.
51. Dividend paid is a non-deductible expenditure which increases the real cost of funding.
52. In case of liquidation, preference shareholders get prior charge over the residual assets compared to the equity shareholders.
53. All loans, except demand loans, are term loans and are generally granted for short terms to long terms. Short term loans are repaid within a year. Long term is period from 5 to 10 years and medium term is a range from 1 to 5 years. This is the period within which the loans are to be fully repaid. Loans granted for housing are generally for long period ranging from 5 years to 30 years.
54. Term loans are granted to acquire assets like land, buildings, plant and machinery to establish a factory or set up a project which are tangible and have a long useful life. For the reasons such as long gestation period, slow start to cash generation cycle and longer life, a longer period is granted for repayment.
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55. If the project is already running and loan is taken for capacity build up, a shorter period up to 5 years will suffice as cash flows are already there.
56. Short to medium term loans are preferred for other tangible assets such computers, peripherals, furniture, renovations etc. Loans are also granted for housing and soft furnishing.
57. Term loans carry a fixed and predetermined rate of interest.
58. Moratorium is granted for principal repayments where projects are large and cash generations are likely to take time.
59. In cases like EMI, the financial burden is evenly spread out though the interest component gradually goes down. From every instalment, the accrued interest is carved out first and only the remaining amount is apportioned towards principal.
60. Working Capital Term Loan (WCTL) is not a type of normal term loan given by any bank or Financial Institution. It is a term loan against the current assets. It is used in the banking industry when a working capital loan, given by a bank, is not being properly serviced by the borrower due to temporary liquidity constraints.
61. Section 2(30) of the Companies Act, 2013 defines “debenture” which includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
62. Debenture is a written instrument acknowledging debt by the company promising repayment at a certain future date.
63. Debenture is an instrument issued by the borrower company promising to pay. At fixed future date, a certain amount to the holder.
64. Loans are repaid in instalments over a period of time. On the other hand, debentures are repaid on a fixed date on expiry of the term.
65. Repayment of Debenture on maturity is also called redemption.
66. The company issuing debentures can incorporate an option like call option where it can repay the principal before due date at a fixed price. This is called call option.
67. Section 71(2) of the Companies Act,2013 prohibits giving any voting rights to a debenture holder.
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68. The company issuing debentures can incorporate an option like put option where the investor has the option to demand redemption before due date at a fixed price. This is called put option.
69. In case of convertible (wholly or partly) debentures, which are permitted to be issued, the debenture holder gets an equity stake in the company after conversion in the equity followed by voting rights.
70. Lerner (1999) has broadly defined private equity organization as partnerships specializing in venture capital, leveraged buyouts (LBOs), mezzanine investments, build-ups, distressed debt and other related investments.
71. Private Equity is also called ‘patient capital’ as it seeks to profit from long term capital gains rather than short term regular reimbursements.
72. Private equities are generally less liquid than publicly traded stocks and are thought of as a long-term investment.
73. Pratt (1981) categorised types of private equity' activities in terms of the stages of corporate development.
74. Seed Financing: Providing small sums of capital necessary to develop a business idea.
75. Start-up financing: Providing capital required for product development and initial marketing activities.
76. First-stage: Financing the commercialization and production of products.
77. Second-stage: Providing working capital funding and required financing for young firms during growth period.
78. Third-stage: Financing the expansion of growth companies.
79. Bridge financing: Last financing round prior to an initial public offering of a company.
80. PIPE deals: A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors.
81. Leveraged Buyout (LBO): It entails the purchase of a company by a small group of investors, especially buyout specialists, largely financed by debt.
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82. Management Buyout (MBO): It is a subset of LBO whereby incumbent management is included in the buying group and key executives perform an important role in the LBO transactions.
83. Foreign Direct Investment (FDI) is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act(FEMA) 1999.
84. Foreign Direct Investments (FDI) can be made under two routes—Automatic Route and Government Route.
85. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from RBI or Government of India for the investment.
86. Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required.
87. Indian companies can freely issue equity shares / convertible debentures and preference shares subject to valuation norms prescribed under FEMA Regulations.
88. Issue of non-convertible, optionally convertible or partially convertible are considered as debt. As such, the guidelines applicable for External Commercial Borrowing (ECB), viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations, etc. will apply to such issues.
89. A foreign investor can invest in an Indian company which is a small scale industrial unit provided it is not engaged in any activity which is prohibited under the FDI policy. Such investments are subject to a limit of 24% of paid-up capital of the Indian company/SSI Unit.
90. The process of raising long term finance ends with equilibrium between what the borrowers can or are willing to offer and what the lenders expect.
91. Equity shares have unlimited life, and voting rights and receive dividends
92. Preference shares have limited voting rights.
93. A debenture issued for a period of ten years is a long-term loan.
94. Perpetual Debt capital refers to funds raised by borrowing that need not be repaid.
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02 Financial and Operating Leverages
01. Financial leverage means enhancing EPS without shareholders bringing money themselves but by borrowing.
02. Financial leverage is a strategy to use borrowed funds to enhance return on the investment of equity investors.
03. Debt- to- Assets ratio is calculated as Total Debt / Total Assets
04. Debt- to- Equity ratio is calculated as Total Debt / Total Equity
05. Debt-to FBIDTA ratio is calculated as Total Debt /EBIDTA
06. Du-Pont analysis uses the “equity multiplier” as a measure of financial leverage.
07. Equity Multiplier = Total assets / Total Equity
08. Interest Coverage ratio is calculated as EBIT / Interest expense
09. An optimal level is one which is just the right mix of equity and debt.
10. For calculating the degree of financial leverage, we seek to establish correlation between the operating profit (EBIT) and the interest expense, which is assumed to be a fixed expense.
11. Degree of Financial Leverage (DFL) is defined as ratio of percentage change in EPS and percentage change in EBIT, and can be mentioned as under:
Percentage change in earnings per share (EPS)
DFL = --------------------------------------------------------------------
Percentage change in earnings before interest and tax (EBIT)
EBIT (Earnings before interest and tax)
12. DFL = ---------------------------------------------
EBT (Earnings before tax)
13. When DFL is more than one (1), financial leverage becomes relevant. More the DFL, higher is the financial leverage.
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14. A positive DFL means that the firm is operating at a level higher than the break-even point and EBIT and EPS also move in the same direction.
15. Negative DFL indicates that the firm is operating at lower than the break-even point and EPS is negative.
16. In financial leverage, we establish a correlation between the fixed financial cost i.e. interest and the profit of the business.
17. In operating leverage, we consider other fixed expenses except interest and correlate these to the profit.
18. A more scientific way to assess the susceptibility of a business to its level of operation is by calculating the Degree of Operating Leverage (DOL)
The formula used is:
Percentage Change in EBIT
Degree of Operating Leverage (DOL) = -------------------------------------
Percentage change in Sales
Contribution
19. DOL =--------------------------
EBIT
20. Contribution = Sales Revenue – Variable Cost
21. EBIT = Contribution – Fixed Operating Costs
22. When DOL is more than one (1), operating leverage is relevant. A positive DOL/ OL means that the firm is operating at higher level than the break- even level and both sales and EBIT moves in the same direction.
23. In case of negative DOL/ OL, firm operates at lower than the break-even sales and EBIT is negative.
24. There is a relationship between leverage and Break-even point. Both are used for profit planning.
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25. The relationship between leverage, break-even point and fixed cost is as under:
Leverage Break-even point
Firm with high leverage - Higher Break-even point
Firm with low leverage Lower Break-even point
Fixed cost Operating leverage
High fixed cost High degree of operating leverage
Lower fixed cost Lower degree of operating leverage
26. The degree of financial leverage reveals the sensitivity of owners' cash flows to variations in operating cash flows.
27. And the level of operating leverage indicates how sensitive operating cash flows are to fluctuations in sales.
28. The degree of total leverage (DTL) is a measure of the sensitivity of cash flows to owners to changes in unit sales that is derived by combining a firm’s degree of operating leverage and degree of financial leverage.
29. In the case of operating leverage, fixed operating expenses serve as a pivot: The greater the fraction of fixed operating costs, the more sensitive operating cash flows are to variations in sales.
30. Fixed financial charges, such as interest, serve as a pivot in the context of financial leverage: The bigger the share of financing with fixed cost sources, such as debt, the greater the sensitivity of owners’ cash flows to changes in operating cash flows.
31. Combining the effects of both types of leverage, it is clear that fixed operating and financial costs operate as a pivot to enhance the sensitivity of available cash flows to changes in the number of units sold.
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03. Capital Investment Decisions
01. The goal of management is to increase the wealth of the shareholders as much as possible.
02. The objective of the capital investment decision is to first assess the requirement and then think about the sources, the cost, the form and the time schedule.
03. Cash requirement of any project can be safely analyzed in terms of long term, short term, owned, borrowed, fixed cost, working capital, inflows and outflows. All this can be appropriately included in a projected cash flow statement. The process requires the following;
• Identify the elements of cash flow:
• How to estimate and basis of each such element:
• Collate all the components of cash flow:
04. The project cost is the cost incurred for setting up a project. Total project cost consists of total investment in the fixed assets that will enable the entity to start the production.
05. Fixed assets consist of all the tangible assets such as land, buildings, plant and machinery, electrical installations, office equipment, computers, vehicles, staff quarters, etc.
06. Competitive bargaining means that the procurement process is so planned that the price paid for the asset is the best bargained one.
07. A loan appraisal is done to decide whether to give a loan or not.
08. An investment appraisal helps to decide whether to invest or not.
09. Payback period is the period at the end of which the initial investment is entirely returned to the investor.
10. Return of investment is the net cash flow for each of the years of operation.
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11. The formula to calculate Payback Period, in cases where the Net Cash Inflow every year is same, is as under;
Payback Period = Amount to be initially invested / Estimated Annual Net Cash Inflow per year
12. In the cases, where the Net Cash Inflow every year is not the same, we have to add up Net Cash Inflows from the first year till the total is equal to the amount invested initially. This may involve Net Cash Inflow during a part of any year and that part is calculated based on the assumption that cash flow is uniform during the year.
13. The shorter the period for recovery ofinitial investment, lesser is the risk and better or quicker is the probability to earn profits.
14. Payback Period method ignores the cash flow beyond the payback period and hence ignores profit aspect.
15. While calculating cash inflow, depreciation is added back to profit after tax since it does not result in cash outflow. The cash generated from a project therefore is equal to profit after tax plus depreciation.
16. Accounting Rate of Return (ARR) method involves estimating the revenue and expenses for say over three years and to find out the average rate of return which can be considered as the rate for appraising the investment.
17. Average annual net income
Accounting rate of return (ARR) =-------------------------------
Investment
18. Calculation of ARR - Annual Basis
Profit After Depreciation
ARR = -----------------------------------------------
Investment in the beginning of the year
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19. Calculation of ARR - Total Investment Basis
Average Annual Profit
ARR = ---------------------------------------- x 100
Investment in the beginning
20. Calculation of ARR - Average Investment Basis
Average Annual Profit
ARR = ------------------------------------- -- x 100
Average Investment
21. Net present value used in terms of cash flow means the present value of all future cash flows. Cash flows mean net flow; difference between the inflow and outflows and the net flow after setting off the negative flows. The present year cash flow gets full weightage without any discount. The future years’ flows are discounted at a rate considered the expected rate of return which is subjective and may vary based on the expectation of the investor which again is based on the duration and the risk, mainly.
22. If the NPV is equal to 0, then the project will neither add value nor are you likely to lose.
23. Positive NPV means project can be given go ahead and the negative is red signal.
24. Capital Rationing takes various forms e.g. no fresh investments during a year or for a period, no use of retained profits for investment, not to borrow or seek external funds for capital investment. To trigger the rationing, certain norms are fixed like not to take up part of a project, enforce higher IRR or profitability index, fixed money discount rate, inflation linked rate, risk free interest rate etc.
25. Equivalent Annual Costs (EAC): is the cost of the asset is other than that for acquisition. In other words, it is an annual cost of owning, operating and maintaining an asset over its life time.
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26. In terms of capital budgeting and cost analysis, EAC enables us to compare the cost effectiveness of two or more assets with different lifespans.
27. Net present value = Present value of net cash inflow - Total net initial investment
28. Decision Rule:
If NPV > 0 Accept the Proposal
If NPV < 0 Reject the Proposal
29. The NPV method can be used to select between mutually exclusive projects; the one with the higher NPV should be selected.
30. In the context of investment, an Internal Rate of Return means an annual rate of growth in investment a business is going to generate. The concept of calculating NPV and IRR is the same. However, while calculating IRR, the NPV is set to zero.
31. Modified internal Rate of Return (MIRR) is the one calculated to correct aberrations arising out of disruptive or alternatively positive and negative cash flows as also to correct the unrealistic assumption of investing intermittent cash inflows at project IRR. Under this approach, any negative cash flow in any period, during the life of the project, is treated as the cost of the project and added to the initial cost of the project by discounting at the cost ofthe capital. This is called the Present Value of Costs (PVC). Also, the project inflows are compounded at the cost of capital to arrive at the total compounded terminal value (TV) of the inflows. Then an appropriate rate of discount for this compounded terminal value is found out so that this discounted terminal value is equal to the total present value of the cost of the project (PVC). This discount rate is called MIRR.
32. If MIRR is higher than the cost of capital, the project is acceptable.
33. Profitability Index is an index that either explains or represents the relationship between the cost and the benefit of a project proposal. It is also called value investment ratio or profit investment ratio.
34. Profitability Index (PI) is calculated by dividing the present value of future expected cash flows by the initial investment amount in the project.
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35. Higher the Index better is profitability of the project. Anything below 1 indicates that the project is unprofitable.
36. The Profitability Index (PI) is calculated as below:
Sum of discounted cash inflows
PI = --------------------------------------------------------------------------
Initial cash outlay or Total discounted cash outflow (as the case may be)
37. The Profitability Index factor helps us in ranking various projects.
38. Central and State Governments and local bodies or designated corporations take up many projects of infrastructure developments, airports, ports, bridges, dams etc. To support decision making process, Social Cost Benefit Analysis SCBA is carried out. On one hand we have total cost of the project and on the other hand the social cost as well as benefits. One has to attach or allot value to each such impact or benefit. Adverse impact will have negative value and the benefits will have positive value. Adverse impact is the social cost.
39. Loss of mangroves, generation of pollution, impact on plants, extinction of some birds and rare species, water level going down, health hazards are some of the social cost and environment impact.
40. Benefits are ease of travel, fuel savings, time savings, employment generation, uplifting of living standards and bringing order in traffic management and safety, among others. If net result of positive and negative values is positive and equal or more than the cost of the project, the project is considered as beneficial.
41. Identifying, screening, and choosing investment projects are part of capital budgeting.
42. Payback period and discount payback period measure how long future cash flows take to repay the initial investment.
43. The payback period just considers future cash flows’ amounts, whereas the discounted payback period considers their present value. Both methods provide some information about an investment’s desirability, but they don’t tell us if a project would increase the owners’ wealth.
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44. Net present value is the amount the business entity’s value increases if the investment is made. It’s the difference between operating and investment cash flows. An investment profile depicts a project’s NPV for multiple discount rates to show a project’s sensitivity.
45. The profitability index compares projected operating cash inflows to investment cash inflows. The profitability index shows us if an investment will improve the shareholders’ wealth. We can’t use the profitability index to choose between mutually exclusive initiatives because it doesn’t quantify value growth in dollars. When cash is scarce, the profitability index helps prioritise projects.
46. IRR is investment yield. Discount rate equals zero net present value. IRR is risky when comparing mutually exclusive projects or limiting capital spending. The modified internal rate of return is an investment yield assuming cash inflows are reinvested at a different pace. This solution solves the IRR method’s unreasonable reinvestment rate assumptions.
47. MIRR is risky when choosing between mutually exclusive projects or when spending is limited.
48. Net present value maximises owner wealth for mutually exclusive enterprises or capital rationing.
49. In practice, businesses use discounted cash flow techniques, with IRR being the most common.
50. A capital budgeting technique which does not require the computation of cost of capital for decision making purposes is Payback Period method
51. IRR method would favour project proposals which have Heavy cash inflows in the early stages of the project.
52. While evaluating capital investment proposals, time value of money is used in which Net present value technique.
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04. Capital Budgeting for International Project Investment Decisions
01. The capital budget is determined by the company management to plan expenses on fixed assets.
02. The objective of capital budgeting is to make long-term expenditure decisions about whether particular projects will result in sustainable growth and provide the expected returns.
03. Using the capital budgeting approach, each suggested capital investment decision is given a quantitative analysis in order to have a rational approach towards the business decision.
04. If the project implementation time is long, the foreign currency valuation can pose problem because of the rate volatility.
05. Converting local currency into a foreign currency is done at a prevailing rate which is called spot rate.
06. Future contract rate needs to be adjusted by the interest rate and the time factor. To calculate the forward rate, we have to multiply the spot rate by the ratio
07. The Return of foreign investment depends on the type of the asset viz. liquid, growth or long term with risk. More liquid the investment, lesser is the return because liquidity ensures less risk.
08. The Return of foreign investment depends on the product as well as structuring of the same. While secured assets give less return, the unsecured one gives you better return.
09. An investment in a country with stable or strong foreign exchange rate performance, will provide better returns.
10. Capital Asset Pricing Model (CAPM) describes the relationship between the risk and the returns or specifically, between the systemic risk and expected returns.
11. The returns are always based on the risk and the time value of money.
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12. Risk-Free Rate (rf): - The expected rate of return on an investment in a security considered to have no inherent risks is referred to as the risk-free rate. The actual risk-free rate that is used in CAPM shifts depending on the yields that are currently available for the selected security.
13. Market Risk Premium (rm - rf or mrp) - The difference between the expected return on an investment and the risk-free rate is known as the market risk premium.
14. Beta (P) - The S&P 500 index has traditionally been used as a stand-in for the market when calculating beta, which is a measure of the co-variance between the rate of return on a company’s stock and the return on the overall market (systematic risk).
15. Arbitrage Pricing Theory (APT) is an alternative method to CAPM.
16. While CAPM takes into account security returns and market returns, APT method goes beyond it, thinking that market sometimes misprices securities.
17. APT tries to take advantages of any or many arbitrage opportunities or derivatives in the market or the economy. It uses the linear relationship between the asset’s expected return and a number of macroeconomic factors or variables that affect or capture the systemic risk. GDP, Domestic Inflation Rate, Stock Indices, Gold Prices, risk free rate of interest are such factors.
18. Project Evaluation is a strategy that can be used to determine whether a project, programme, or policy is going to be successful and what impact it shall have.
19. Evaluation of a project may lead to changes being made to the internal workflows, the identification of patterns among the project’s intended audience, the formulation of plans for future projects, or the reporting of the value of projects to external stakeholders.
20. Arriving at an appropriate discount rate is essential for applying the discounting methods of project evaluation. While the risk-free interest/discount rate is readily available in both India and the foreign country, we have to arrive at the relevant risk-adjusted discount rate.
21. A beta is a measure of volatility or the systemic risk compared to the market as a whole.
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22. If we find the NPV is equal to 0, then the project will neither add value nor are you likely to lose.
23. Positive NPV means project can be given go ahead and the negative is red signal. The Profitability Index is the next step forward after NPV.
24. When a project has a positive net present value (NPV), it should be accepted.
25. If the IRR is lower than the cost of capital, the project should be abandoned.
26. The IRR rule states that if the internal rate of return on a project is greater than the minimum required rates of return, then the project or investment should proceed.
27. Capital budgeting is done for evaluating long term investment decisions.
28. IRR method would favour project proposals which have Heavy cash inflows in the early stages of the project.
29. The re-investment assumption in the case of the IRR technique assumes that Cash flows can be re-invested at the projects IRR.
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05. Adjustment of Risk and Uncertainty in Capital Budgeting Decision
01. Capital budgeting is required for project implementation which generally takes long time.
02. Budgeting means estimating cost and revenue to be incurred and earned in the future period whether it is a project to be established or is a running enterprise.
03. The word capital budgeting is for new projects generally.
04. Cost includes land, plant, labour, materials and engagement of working capital.
05. One has to perceive the risks in various standalone forms and various sources like market or forms or method of conducting business. All the risks have the propensity to impact sales, cost and profitability.
06. Sensitivity Analysis can be employed to evaluate the budget and the project to a higher degree of risk management. The limitation of this method is that it only shows the NPV and only one variable is changed at a time. To an extent this method is also subjective because it depends on the perception of the decision maker of the analyst.
07. Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or system (numerical or otherwise) can be divided and allocated to different sources of uncertainty in its inputs.
08. Sensitivity Analysis is a tool used in financial modeling to analyze how the different values of a set of independent variables affect a specific dependent variable under certain specific conditions.
09. Scenario Analysis is an extension to the sensitivity analysis where only one variable was changed at a time. In this method, one plans for say, three scenarios namely, normal or the expected, optimistic and the pessimistic scenario. In the normal scenario, all the variables show expected values and the best values are taken for the optimistic scenario. It is in the pessimistic scenario the worst values are placed. Thus, all the variables move in the same directions at the same time.
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10. Hillier’s Model is a risk analysis technique.
11. Hillier’s model is based on NPV.
12. Prof. Fredrick. S. Hillier of Stanford University suggested this model.
13. Hillier’s view was that the risk associated with the cash inflows is reflected in the standard deviation of the cash inflows. Lesser the deviation of cash flows from the mean value, the lesser would be the risk and vice versa. He argued that for risk analysis, value of standard deviation of net present value may be obtained through analytical deviation of the cash inflows. Two cases can be considered for such analysis viz. no correlation among cash flows and perfect correlation among cash flows. When cash flows for different years are perfectly correlated, the behaviour of cash flows in all years is alike. But, if they are not correlated, it implies that cash inflow in any particular year will be independent of the cash inflow in any other year during the life of the project.
14. Simulation means not real, imitation or deception. Simulation is a process of creating a similar but artificial situation.
15 Decision Tree method is a graphical representation of possible outcomes (with their associated probability), attached to each decision.
16. There are two elements in a decision tree:
a) Branch, which represents a decision (which is an alternative course of action).
b) Node, at the end of the branch, which represents the reward of the decision along with the probability attached to that reward.
17. Corporate Risk Analysis is the evaluation of impact of the new project/investment on the combined risk profile of the firm.
18. Certainty Equivalent approach is Guaranteed return from an investment after adjusting for certainty equivalent coefficient.
19. Sensitivity analysis is useful in decision making because it tells the user how much critical each input is for the Output value.
20. When the risk is high, the cash flow under certainty equivalent coefficient is Lower.
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06 Decision Making
01. In practical terms, the cost, volume and the price are the important ingredients of any profit analysis.
02. Cost has two main components namely, fixed and variable.
03. The fixed cost per unit will go down if volume of production or sales increases.
04. Variable cost generally varies with volume but here too the variance will depend on the product mix and the processes adopted.
05. Higher volume of productions will generally reduce the cost of production due to economy of scale, but incremental cost due to upscaling the facilities may again change the cost structure.
06. Higher volume in sales may accompany with disproportionate increase in marketing cost, some of which will be for brand building and the rest may commensurate with the sales volumes. While pricing will have direct impact on profitability, it in fact determines the breakeven point.
07. Higher the sales realisation, earlier the breakeven point.
08. Volume will also have direct impact on absolute profits, which too will be a determining factor in calculating the breakeven point.
09. In decision making, one of the other ways is to classify the costs according to whether they are relevant or not to a particular decision. This concept is called Relevant Cost Concept and is valid and applicable for not only while planning an investment, but also while running a business, on the premises that decision making is a constant process and cost is an integral part of it.
10. Relevant costs are those future costs which will be affected by a decision whereas, irrelevant costs are those which are not affected by the decision.
11. If one owns both, a diesel and a petrol car, and he has to undertake a long journey, the decision about using diesel or petrol car will take into account the costs of petrol and diesel but not the cost of road tax and insurance, as these costs are already incurred and will remain the same, irrespective of the decision.
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So, the costs of petrol and diesel are relevant costs, while the costs of road tax and insurance are irrelevant cost.
12. In this example, the costs of road tax and insurance are called “Sunk Costs” as these are made even before the decision making process starts.
13. Relevant costs are also categorised as Avoidable costs, while the irrelevant costs are categorised under Unavoidable costs. This is because avoidable costs are incurred only if a specific business decision is made while the unavoidable costs will have to be incurred irrespective of the outcome of the decision.
14. The relevant cost concept helps the decision making process by discarding the irrelevant cost data and thus, make the decision making process less complicated.
15. When you use the resources for another project, you will lose that opportunity and potential income. That lost income is the opportunity cost. Opportunity cost thus does not require the payment of cash or its equivalent.
16. It is a potential benefit or income that is given up as a result of selecting an alternative over another.
17. The allocation method involved allocating costs to a product or customer using metrics such as the total number of units produced, accounts, customers, or transactions.
18. Activity Based Costing (ABC) is used for estimating the cost which in turn is used for decision making. It has been widely used to help the management in taking important decisions like pricing, outsourcing etc. The method is used for costing of products, service or even a customer who is being serviced, all termed as objects under this method.
19. ABC method of costing is based on the fact that the products and services, provided by a company to its customers, involves various such activities which are not exclusively related to one product or service.
20. Activity-Based Costing (ABC) is technique of appropriately assigning the costs of such activities to various products and services of the company.
21. ABC involves identification of each cost driving activity and apportioning its cost to different products or jobs. The basis for this allocation is the quantity of each such cost driving activity required for their completion.
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22. Under Activity-Based Costing (ABC) technique, the overhead costs of the company are identified with each cost driving activity.
23. In the traditional approach, we allocate the overheads based on the volume ofproduction unlike in ABC system where the allocation is activity based calculated on the basis of cost drivers of the activities.
24. ABC method can give us product profitability as well as customer profitability. It can also throw light of process efficiency. In short, activity-based cost information is both intuitive and logical.
25.
Total cost of activity
Activity cost driver rate = ---------------------------
Activity driver
26. Character-Based Decision-Making Model, developed by Josephson Institute of Ethics provides a framework that can be used to decide whether a decision is morally and ethically sound.
27. The six pillars of Character-Based Decision-Making model are: Trustworthiness, Respect, Responsibility, Fairness, and Citizenship. The model suggests a seven-step path to better decisions.
28. The Character-Based Decision-Making model suggests the rationalization of obstacles to ethical decision making.
29. The Character-Based Decision-Making model involves the Golden Rule - “Help when you can and avoid harm when you can.” It also involves the principle that, in general, the company should make decisions that promote the greatest amount of moral justness.
30. The cost, volume and price are the key ingredients of any profit analysis. Cost has two main components namely, fixed and variable. Variable cost generally varies with volume but here too the variance will depend on the product mix and processes adopted.
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31. Price also has direct impact on profitability as it determines the breakeven point.
32. Cost, volume and price remain the most important and constant factors affecting the profits, breakeven point, and payback period.
33. Every business decision has its cost whether known, unknown, direct or indirect.
34. Relevant Cost is not a fixed or onetime concept but a concept relevant at a given time for a given situation. It varies in total from one alternative to another and can be applied to all business decisions.
35. Activity Based Costing (ABC) is used for estimating the cost of products, services and customers. The method runs on the philosophy that it is better to be approximately right than precisely wrong. It is based on the activities undertaken to produce each product or service. Cost of any product is changed when there is a change in the cost of an activity.
36. Activity Cost Resource Driver is a measure of production, marketing, research etc. for an organisation. It can give us product profitability as well as customer profitability and process efficiency.
37. A cost driver is (d) An activity which generates costs
38. In activity-based costing, costs are accumulated by activity using (c) Cost pools
39. Compassion is a fine human quality. It is a feeling or showing a sympathy and concern for the fellow beings.
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Index
Advanced Business & Financial Management (ABFM)
Module C:
Valuation, Mergers & Acquisitions
Chapter No
Topic
01
Corporate Valuation
02
Discounted Cash Flow Valuation
03
Other Non-DCF Valuation. Models
04
Special Cases of Valuation
05
Merger, Acquisition & Restructuring
06
Deal Structuring and Financial Strategies
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01. Corporate Valuation
01. Corporate valuation is the process of determining the value of a company entity, and it is most commonly used in the context of the financial industry.
02. There are two primary types of value – Book Value and Market Value.
03. Book value can be described as the value of an asset or the complete business entity as established by the books or the financials of the company. Thus, we may say that the book value can be derived from the Balance Sheet.
04. Market Value refers to the value that is derived through the analysis of the market. The market capitalization of a company, often known as the number of outstanding shares multiplied by the share price, defines the market worth of a company.
05. The market value is fundamentally an equity value because equity investors value a company’s shares apart from debt lenders and other investors.
06. The term “enterprise value,” which is synonymous with “firm value,” refers to the value that is placed on a complete company, including its debts and other commitments.
07. The significance of enterprise value lies in the fact that it comes close to approximating the worth of an entity’s running assets.
08. “Debts and other obligations” can include short-term debts, long-term debts, the current portion of long-term debts, capital lease obligations, preferred securities, non-controlling interests, and other non-operating liabilities.
09. Fair market value, as per United States Internal Revenue Service (IRS), is “the price at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
10. The International Assets Valuation Standards Committee is responsible for developing the International Valuation Standards (IVS), which are intended to be used as the primary guide for valuation professionals all over the world, in order to underpin consistency, transparency, and confidence in valuations.
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11. The principal valuation approaches, as per IVS 105, are:
(a) Market approach - When determining the value of an asset, the market approach takes into account its size, quantity, quality, and other characteristics, in addition to the values of comparable assets.
(b) Income approach - When valuing a company, the income approach is utilised to determine the present or current value of the company’s expected future earnings or cash flows. The net operating income (NOI) of the company is determined using this method, and then that figure is divided by the rate of capitalization.
(c) Cost approach - The cost approach, which is also known as the asset-based approach, is able to extract value by combining the FMV (Fair Market Value) ofthe company’s net assets. This method is also known as the asset-based approach (assets less its liabilities). In layman’s terms, this methodology has a tendency to determine the worth of the firm on the basis of the value of the assets held by the business.
12. The four primary methods that can be utilised for determining the value of a firm are 1. Adjusted Book Value Approach, 2. Stock and Debt Approach, 3. Direct Comparison Approach, and 4. Discounted Cash Flow Approach.
13. Relying just on the data shown in a company’s balance sheet, is the least complicated method for determining the company’s value.
14. When determining the value of a company, there are two methods that are functionally equal to using the information from the balance sheet.
15. The assets of an organisation that are not essential to its day-to-day operations are referred to collectively as “non-operating assets.”
16. Financial securities, surplus land, and disused structures are the three types of non-operating assets that are most frequently encountered. The assets in question are evaluated based on their true value in the market.
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17. When a company’s securities are traded on a public exchange, the worth of the company can be determined by simply adding the current market value of all of its outstanding securities. This straightforward method is referred known as the stock and debt approach.
18. The Direct Comparison Approach is founded on the Principle of Substitution, which states that a buyer will not pay more for a given property than the cost of a comparable, competitive property with the same utility in the open market, provided there is no delay in making the transaction.
19. In The Direct Comparison Approach, the analysts look for one or two businesses that are extremely similar to the company whose value they are attempting to determine. Then, they base their estimate on the prices at which the similar businesses are selling their products or services. The most important aspect of this analysis is locating these comparable businesses and determining their current market prices.
20. The present value of potential future cash flows can be calculated using a method known as discounted cash flow, or DCF, for short. Obtaining an investment’s value, with the use of this strategy, is possible.
21. The DCF technique requires one to apply a discount rate to each periodic cash flow of the company. The discount rate is determined by that company’s cost of capital. The total Present Value (PV) of all future cash flows can be calculated by multiplying this discount by each future cash flow to arrive at a number that represents the total present value of all future cash flows.
22. The idea that cash received today is more valuable than cash received at some point in the future, is the fundamental tenet upon which discounted cash flow analysis is built. The reason for this is that someone, who commits to receive money at a later date, forgoes the chance to invest that cash right now in order to obtain payment at a later period. Paying someone for the privilege of delaying a payment, which is known as interest income, is the only method to get someone to agree to the delay in payment.
23. The method of arriving at the Present Value (PV) of the firm, by discounting future cash flows, is a helpful tool for assessing the value of the firm. It is also possible to use it to evaluate cash flows of other similar firms in order to determine which one has the greatest present value.
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24. The DCF method of valuing a firm is similar to that for evaluation of a capital project. However, when valuing a company with the discounted cash flow methodology, it is necessary to make cash flow projections over an unspecified amount of time unlike a project which is presumed to have a definite life. Also, the basic presumption in a capital project is that it will not expand during its life-cycle. But, a business entity is anticipated to expand in the future. This is, without a doubt, a challenging proposition.
In order to accomplish this objective, the value of the company is typically segmented into two time periods, namely:
Value of the firm = Present value of cash flow during + Present value of cash flow after the explicit forecast period the explicit forecast period
Since it is anticipated that significant change will take place within the company over the explicit forecast term, which is typically between 5 and 15 years, a significant amount of effort is put into the forecasting of its yearly cash flow. Because it is presumed that the company will have reached a “stable level” by the time the explicit prediction period is up, a more straightforward method is used to calculate the ongoing value of the company.
25. Operating Invested Capital: Both operating and non-operating assets can be acquired using the funds provided by shareholders and lenders. This capital is referred to as invested capital. Operating Invested Capital refers to that portion of the invested capital which is used to acquire only operating assets. The operating working capital is also added to it to arrive at total Operating Invested Capital.
26. Operating working capital is calculated by subtracting non - interest bearing current liabilities from operating working capital assets, operating working capital assets are total working capital assets minus non-operating working capital assets like excess cash and marketable securities.
27. The actual operating performance of the business is the primary focal point of the Return on Invested Capital metric. It is a more precise indicator when compared to return on equity as well as return on assets. Return on assets is inconsistent with itself, but return on equity reflects both financial structure and operational performance. The numerator and denominator are not consistent in these cases.
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28. Net Investment: The difference between the amount of gross investment and the amount of depreciation is known as the net investment.
29. The term “gross investment” refers to the sum of “cumulative expenditure,” which includes expenditure on current as well as non-current assets.”
30. The term “depreciation” refers to any and all costs that are not paid in cash.
31. There are three distinct valuation methods for an existing investment that we need to take into consideration before reaching this determination.
The first type of value is known as the continuing value, and it is a reflection of the current value of the anticipated cash flows that will result from maintaining the investment until the end of its life.
The second type of value is known as the liquidation or salvage value, and it refers to the amount of net cash flow that the company would obtain if it ended the project right now.
And last but not least, there is the divestiture value, which is the sum that the investor with the highest offer will pay for the asset in question.
Depending on which of these three values is the highest, a company must decide whether to continue working on an existing project, whether to liquidate the project, or whether to sell it to someone else.
32. The broad classifications of the various methods used for finding out the continuing value include cash-flow and non-cash flow methods.
A) Cash Flow Methods:
a) Growing free cash flow perpetuity method
b) Value driver method
B) Non-Cash Flow Methods:
a) Replacement Cost Method
b) Price-PBIT ratio method
c) Market-to-book ratio method
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33. Net operating profit less adjusted taxes (NOPLAT) is a financial metric that calculates a firm's operating profits after adjusting for taxes. By using operating income, or income before taking interest payments into account, NOPLAT serves as a better indicator of operating efficiency than net income.
34. NOPLAT = EBIT - Taxes on EBIT
35. Weighted Average Cost of Capital (WACC) represents cost of capital across all sources, including common shares, preferred shares, and debt. The cost of each type of capital is weighted by its percentage of total capital and they are added together.
36. The predicted cash flows over a company’s lifetime are discounted to their present value to determine the company’s worth.
37. Growth is the most important factor included in any valuation method, and there are three different places to look for growth rates.
One is to look to the past, despite the fact that both calculating and making use of historical growth rates can be challenging for most companies due to the volatility and occasionally negative earnings that they experience.
The second source is growth projections derived from industry analysts. When estimating operational income, it’s important to keep in mind that the analyst’s primary focus is on the rate of growth in earnings per share.
The third method, which is also the most reliable, is to gauge expansion based on the foundations of a company.
38. It is expected of a valuer to conduct him self in a professional manner with objectivity at all times by ensuring that his decisions are made without the existence of any kind of prejudice.
39. Direct Sales Comparison Method is best for evaluating an owner-occupied, non-incomeproducing, residential bungalow.
40. Material expense is a direct costs and is included in replacement cost.
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02. Discounted Cash Flow Valuation
01. Discounted Cash Flow Valuation is grounded in the concept of present value, which states that the value of any asset is equal to the sum of the asset’s predicted future cash flows, expressed as a present value.
02. The cash flows will be different for each asset, such as dividends for stocks, coupons (interest) and the face value of bonds, and cash flows after taxes for real estate projects.
03. The level of risk associated with the expected cash flows will determine how the discount rate is calculated; higher rates will be applied to riskier assets, while lower rates will be applied to safer projects.
04. The Discounted Cash Flow Valuation Method seeks to arrive at an estimate of an asset’s true worth, by basing that estimate on the asset’s underlying characteristics.
05. The dividend is the only source of cash flow that an equity investor receives from a publicly traded company.
06. The total cash flow to all claim holders in the company is what is referred to as the cash flow to the firm.
07. Free Cash Flow to the Firm (FCFF) represents the amount of cash flow from operations available for distribution after accounting for depreciation expenses, taxes, working capital, and investments. FCFF is a measurement of a company's profitability after all expenses and reinvestments. It is one of the many benchmarks used to compare and analyze a firm's financial health.
08. The question “how much money would have to be invested presently, at a particular rate of return, to yield the anticipated cash flow, at its future date?” can be answered through the process of discounting future cash flows.
09. In other words, discounting determines the present value of future cash flows by using a rate that is the cost of capital that most accurately reflects the risk and timing of the cash flows. This rate is called the discount rate.
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10. Default risk is the risk a lender takes that a borrower will not make the required payments on a debt obligation, such as a loan, a bond, or a credit card. Lenders and investors are exposed to default risk in virtually all forms of credit offerings.
11. Enterprise DCF Model applies a discount rate equal to the weighted average cost of capital to the free cash flow to the firm (FCFF). This has been discussed earlier in the book.
12. Equity DCF Model cash flow model can be implemented in two different ways: the dividend discount model and the free cash flow to equity model.
13. The dividend discount model takes into account the cost of equity when calculating a discount on the expected dividend stream.
14. The free cash flow to equity model also takes into account the cost of equity when calculating a discount on the free cash flow to equity.
15. Adjusted Present Value (APV) Model discounts the unlevered equity cash flow (which is the same as the free cash flow to the firm) at the unlevered cost of equity (the cost of equity assuming the firm has no leverage) and adds to it the discounted value of the interest tax shield on debt. This results in an estimate of the present value of the unlevered equity cash flow.
16. In the Economic Profit Model the economic profit stream is discounted using the weighted average cost of capital, and then the currently invested capital is added to the resulting value.
17. The Dividend Discount Model is a quantitative method of valuing a company’s equity shares price based on the assumption that the fair price of share equals the present value of the company’s future dividends.
18. The H model is a growth model that consists of two stages.
19. The H model postulates that the exceptional growth rate in the beginning stage does not remain constant but rather decreases linearly over time until it achieves a stable rate in the steady stage.
20. H-Model assumes that the growth starts at a higher rate, and then gradually declines till it becomes normal stable growth rate. "H" represents half-life of the high growth period.
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21. Three Stage Model Combining the two-stage model with the H model resulted in the creation of the three-stage growth model.
22. Three-stage growth model presupposes that there will be an initial time of stable high growth, a second period of growth that will decrease in a linear fashion, and a third era of steady low growth that will continue on indefinitely.
23. In order to use the DCF approach, you need to have credible projections of the future cash flows as well as discount rates.
24.
1. When making valuations, market-based approaches should not be used in the event that there are significant and unprecedented shifts in the market price.
2. The discounted cash flow method of valuation is based on Anticipated cash flows along with discount rates.
3. Under the discounted cash flow valuation, Overall cost of capital is employed as the discounting factor.
4. Present value indicates the value of cash flows expected in future.
5. The shares of company are quoted at Rs. 40 per share. Last year, the firm had paid dividend @ Rs. 4 per share. The estimated growth of the company is approximately 16% per year. The required rate of return is 20%. What is the market value of equity shares as per dividend growth model?
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03. Other Non-DCF Valuation. Models
01. Valuation methods are broadly divided into two groups: The Discounted Cash Flow (DCF) methods and Non-DCF methods.
02. A relative valuation places an asset’s worth in comparison to the prices at which other, comparable assets are selling on the market, at the moment.
03. When it is difficult to quantify something’s value in a direct way, we compare it to other things, such as a similar product that is currently on the market or several iterations of the same product. When we compare things, we generate values that are relative to one another.
04. Dan Ariely, a famous Behavioural Economist and author of the famous book ‘Predictably Irrational: The Hidden Forces That Shape Our Decisions’ has stated in his book that “humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.”
05. Similar assets should be sold for values that are comparable to one another, according to both common sense and economic reasoning. In accordance with relative valuation approach, one can determine the worth of an asset by analysing the price at which a comparable asset was sold to a buyer who was properly educated and to a seller who was similarly knowledgeable.
06. In place of discounted cash flow valuation, relative valuation is frequently regarded an alternative.
07. The DCF technique serves as the conceptual basis for the majority of relative valuation indicators.
08. In the first edition of their book ‘Security Analysis’ which laid the intellectual foundation for what would later be called Value Investing and was published in 1934, Benjamin Graham and David L.
09. Dodd presented equity valuation based on a price-to-earnings (P/E) multiple as the typical method of that time.
10. The price-to-earnings multiple, or P/E multiple, is a popular valuation statistic that is typically defined as follows:
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Market price per share
P/E multiple = ------------------------------
Earnings per share
11. The Price-To-Sales Multiple, sometimes known as the P/S multiple, is a method of valuation. The P/S multiple is determined by dividing the current stock price of a firm by the revenue per share that the company has generated over the course of the most recent twelve months. Alternately, it can be calculated by dividing the company’s current market value of equity capital by its annual sales. This approach yields the same result. In essence, the P/S multiple shows the amount of money that the market is ready to pay for each rupee of sales.
12. The variable, which is the primary contributor to the overall level of explanation, is referred to as the companion variable.
13. PEG Ratio is defined as the ratio of price to earnings divided by the anticipated annual growth rate in earnings per share.
14. PEG ratio = PE ratio/Expected growth rate
15. The multiple of the P/B to the ROE, is known as the value ratio.
16. A company’s Price Earnings Ratio is measured in relation to the average for the market using relative price earnings ratios.
17. Relative PE = Current PE ratio fiim/Current PE ratio market
18. Enterprise value multiples put the emphasis on the value of the business itself, in contrast to equity multiples, which place the emphasis on the value of the equity. Typically, some measure of earnings, assets, or sales contributes to the determination of the enterprise value.
19. The following are some examples of enterprise value multiples that are regularly used - EV/EBITDA multiple; EV/EBIT multiple; EV/FCFF multiple; EV/BV multiple ; EV/Sales multiple
20. The P/E multiple is more appropriate for companies that have (a) a demonstrated track record of positive earnings and (b) no large non-cash expenses. This is because these companies have a proven track record of being profitable.
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21. The PEG multiple is best utilised by companies that have low volatility in their earnings per share growth rates and risk characteristics.
22. The P/B multiple is better suited for companies whose balance sheets represent the market worth of their assets in a manner that is at least somewhat accurate. Banks and other financial institutions are two good examples.
23. Companies with significant non-cash expenses are better suited to use the EV/EBITDA multiple (depreciation and amortisation). Examples include companies that require a significant amount of capital investment, such as airlines, phone providers, and refineries.
24. The EV/FCFF multiple is more suited for companies that have stable growth and predictable capital expenditures.
25. The EV/sales multiple makes sense for companies that are still relatively young and have not yet established a track record of positive profitability.
26. Book value is a good proxy for real worth when applied to a tangible asset that has no growth potential, very few growth opportunities, or no chances at all for producing greater returns.
27. Book value and true worth will be very different for an organisation that has large chances for growth and the possibility of producing returns that are significantly higher than average.
28. The degree of precision that may be achieved using the book value technique is directly proportional to the degree to which the net book values of the assets accurately represent their fair market values. There are three potential causes for a discrepancy between book prices and market values:
a) The difference between the asset’s book value and its current value will widen as a result of inflation. The historical cost of an asset is subtracted from its total depreciation to arrive at its book value. As a result, it does not take into account inflation, which is unquestionably one of the factors that influences market value.
b) As a result of advancements in technology, certain assets become obsolete and useless even before they have been completely written off in the books as having been depreciated.
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c) On the balance sheet, organisational capital does not appear, despite the fact that it is a very important asset. Value is added to an entity’s organisational capital when employees, customers, and suppliers are brought together in a connection that is mutually beneficial and productive for all parties involved. One of the most essential aspects of organisational capital is the fact that it cannot be readily disassociated from the company in its current state as a functioning entity.
29. When a company’s securities are traded on a public exchange, the value of the company can be determined by simply adding up the current market value of all of the company’s outstanding securities.
30. Appraisers of properties use a straightforward methodology that they refer to as the stock and debt approach. Another name for this strategy is the market-based approach.
31. The worth of an asset can be determined by analysing its pricing in relation to the pricing of comparable assets in terms of a common variable such as earnings, cash flows, book value, or sale is known as Relative valuation
32. A ratio that illustrates the stock market’s readiness to pay for one rupee of earnings per share is referred to as an earnings multiple. This is known as Ratio of Pi ice to Earnings.
33.The price-to-earnings ratio goes up when Discount rate goes down and reinvestment rate goes up.
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04. Special Cases of Valuation
01. The traditional forms of intellectual property assets, such as patents, trademarks, and copyrights, are what are meant to be referred to when using the term “Intellectual Capital.”
02. Intangible Assets include brand recognition, customer loyalty, and intellectual property.
03. Intangible assets might take the form of a company’s brand name (as is the case with Pepsico, Coca-Cola etc.), patents (as is the case with Serum Institute, Bharat Biotech, Pfizer etc.), or technological competence (as is the case with Infosys, Intel and Microsoft etc.), but they all have certain things in common.
04. The owner of a franchise is granted the right to promote and sell a company’s branded good or service under the franchise’s name.
05. The individual who buys the franchise, known as the franchisee, is responsible for paying the franchisor (McDonald’s or Maruti Suzuki), either an initial charge or an ongoing annual cost in order to operate the franchise. In exchange, the individual receives the power of the brand name, as well as the support of the corporation and advertising backing.
06. There are three distinct approaches to estimate of the worth of the intangible assets.
(a) Capital Investment:
(b) Discounted Cash Flow Valuation:
(c) Relative valuation:
07. Real Versus Financial Assets
08. The value of any asset that produces cash flows is equal to the asset’s predicted cash flows multiplied by their present value.
09. The risk of any asset, whether real or financial, is defined as the percentage of that asset’s variance that cannot be diversified away by the fundamental models that are used to estimate the cost of equity for financial assets. These models are used to calculate the cost of equity.
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10. When determining the worth of a company, we have to will look at information from three different sources.
a) the company’s most recent set of financial statements.
b) the company’s history, both in terms of its earnings and the prices it has been selling its products for.
c) by comparing the firm to its peers.
11. Expected Reinvestment = Expected Change in Revenue / (Sales/Capital)
12. Expected reinvestment rate (Stable) = Expected Growth (Stable) / ROC(stable)
13. In order to go from the value of the firm to the value of the equity, we deduct all claims on the firm that are not equity claims.
14. When companies reach a certain level of maturity, the non-equity claims take the form of outstanding bank debt and bonds. When determining the value of the common equity, it is necessary to first determine the value of any preferred equity claims that may exist in new companies and then subtract those values from the total.
15. When converting equity value to value per share, it is necessary to take into account the number of equity options that are currently outstanding on the company.
16. When conducting an asset-based valuation, we determine the value of a financial services company’s existing assets, deduct the amount of debt and any other claims that are still due, and then report the difference as the equity’s value.
17. The equity in a company is a residual claim, which means that the holders of equity have a right to any cash flows that remain after all other financial claimholders have been paid off (including debt Holders, preferred stock holders, and so on). The same rule applies in the event that a company is put into liquidation: equity owners are entitled to the cash that remains in the company after all of the company’s outstanding debt and other financial demands have been satisfied.
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18. Convertible bonds and stock are a kind of traditional debt and preferred stock that additionally include a conversion mechanism, often known as a call option, that allows the holder to convert the bonds or stock into shares of common equity at a predetermined price per share. Because the value of such debt is equivalent to the value of the common stock, it is not independent ofthe enterprise value of the company; as a result, it cannot be subtracted from the enterprise value of the company in order to determine the equity value of the company.
19. The amount of earnings generated in the base year can have a major impact on the valuation of cyclical companies.
20. Financial distress is a condition in which a company or individual cannot generate sufficient revenues or income, making it unable to meet or pay its financial obligations. This is generally due to high fixed costs, a large degree of illiquid assets, or revenues sensitive to economic downturns. For individuals, financial distress can arise from poor budgeting, overspending, too high of a debt load, lawsuit, or loss of employment.
21. Cross holding is a situation in which a publicly-traded corporation owns stock in another publicly-traded company. So, technically, listed corporations own securities issued by other listed corporations.
22. Relative valuation, also referred to as comparable valuation, is a very useful and effective tool in valuing an asset. Relative valuation involves the use of similar, comparable assets in valuing another asset. In the real estate market, relative valuation forms the framework for valuing a piece of real estate.
23. A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.
24. The cost of equity is the return that a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm’s cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership. The traditional formula for the cost of equity is the dividend capitalization model and the capital asset pricing model (CAPM).
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25. The aim of Asset Pricing Models is to determine the fundamental value of an asset. There is a close relation between the fundamental value and an appropriate return. The main focus of asset pricing theories is to determine this appropriate return.
26. The operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating income by its net sales. Higher ratios are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.
27. Non-operating assets are assets that are not considered to be part of a company's core operations. A company's non-operating assets may be unused land, spare equipment, investment securities, and so on. Income from non-operating assets contributes to the non-operating income of a company.
28. Negative earnings—or losses—can be caused by temporary (short-term or medium-term) factors or permanent (long-term) difficulties. Investors are often willing to wait for an earnings recovery in companies with temporary problems, but may be less forgiving of longer-term issues.
29. The pay-out ratio is a financial metric showing the proportion of earnings a company pays its shareholders in the form of dividends, expressed as a percentage of the company's total earnings. On some occasions, the pay-out ratio refers to the dividends paid out as a percentage of a company's cash flow.
30. An asset-based approach identifies a company's net assets by subtracting liabilities from assets. The asset-based valuation is often adjusted to calculate a company's net asset value based on the market value of its assets and liabilities.
31. A company will be in distress if there is a reasonable likelihood. that the company may reach a position within the next six months where it will no longer be able to. pay its debt as it becomes due and payable.
32. Near cash investments also known as Near Money is a term which describes high liquid non-cash assets that are easily convertible into cash. Also, near money can be called cash equivalents
33. Intangible assets are Non-monetary assets devoid of physical substance.
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34. Relative Approach is most suitable for the purpose of determining the value of the intangible assets.
35. Low liquidity would have a negative impact or the demand for real estate.
36. A convertible security is a bond or preference share that can be converted into an equity share at the choice of the holder.
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05 Merger, Acquisition & Restructuring
01. Corporate re-structuring refers to any modifications made to a company’s assets, financial structure, or ownership structure, as well as any expansion or contraction ofthe company’s operations.
02. Mergers, acquisitions, and takeovers; financial restructuring and reorganisation; divestitures, de-mergers, and spinoffs; leveraged buyouts; and management buyouts are the most prevalent types of corporate restructuring.
03. In everyday conversation, the phrases “mergers,” “acquisitions,” and “takeovers” are frequently used synonymously with one another. However, there are distinctions.
04. Acquisition is the process of one entity buying out another and absorbing it into itself.
05. Merger refers to the combination of two separate entities into one.
06. In the context of Indian law, the term “merger” is more accurately rendered as “amalgamation.”
07. The amalgamations can be by merger of firms within the limits of the Companies Act, and acquisition through takeovers.
08. The Securities and Exchange Board of India (SEBI) oversees takeovers, although the Companies Act governs mergers and acquisitions(M&A) deals.
09. In cross border transactions, international tax considerations often arise.
10. When one business merges with another, or when one business is acquired by another, this process is referred to as “amalgamation.”
11.In the event of an amalgamation, the rights and liabilities of one company are merged into those of another company, making the transferee company vested with all of the rights and liabilities of the transferor company.
12. A Take-over occurs when both, the company doing the take-over and the company being taken-over, are able to continue operating independently following the completion of the deal.
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13. If the acquisition results in consolidation, it means the legal dissolution of both of the companies involved and the creation of a new company into which the prior entities are combined.
14. When a merger results in the legal dissolution of only one of the corporations involved, it is called absorption.
15. In general, a reconstruction, reorganisation, or scheme of arrangement is the term used to describe a situation in which only one firm is involved in a scheme and the rights of the owners and creditors are altered.
16. In the process of amalgamation, two or more businesses are combined into a single entity by the use of mergers or by one business purchasing another.
17. An amalgamation is the process of combining two or more existing businesses into a single entity.
18. A common definition of a merger is the coming together of two separate businesses into one. The process of dissolving one or more businesses, corporations, or proprietorships in order to construct another company through absorption into it, is what is meant by the phrase “merger.” The combined business would be significantly larger after the transaction was completed.
19. The following are some of the most common types of mergers.
Horizontal Merger:
Vertical Merger:
Mergers Between Conglomerates
Congeneric Merger
Reverse Merger:
20.Horizontal Merger: The two businesses that have recently merged are both operating in the same market sector. As a result, the newly consolidated company will likely have a larger market share than its predecessors, and it is possible that it will move closer to becoming a monopoly or a near monopoly in order to eliminate competition.
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21. Vertical Merger: This type of merger takes place when two organisations that have a “buyer-seller” relationship (or potentially have a buyer-seller relationship) come together to form a single entity.
22. Mergers Between Conglomerates include companies whose lines of business are completely unconnected to one another.
23. Congeneric Merger - The acquiring company and the company it is merging with are connected in some way, whether it is through fundamental technologies, industrial methods, or market segments. The acquirer will benefit from an expansion of their product range, market participation, or technological capabilities as a result of the acquired company. These mergers represent an outward shift by the acquirer from its existing business environment to other similar business activities within the overall structure of the industry as a whole.
24. A Reverse Merger occurs when a smaller, unlisted company acquires a larger, publicly listed company. This allows the unlisted company to avoid the lengthy and complicated process that would be necessary to be followed in the event that it desired to issue its shares to the public through an Initial Public Offering.
25. Acquisition refers to the purchase of a controlling interest in the share capital of an existing firm by one corporation from another corporation.
26. When one company acquires another, the acquiring firm has two options: either it can combine both businesses into a single entity and operate as a single entity, or it can continue to run the taken-over company as an independent entity but with new management and different policies.
27. A “merger” refers to the coming together of two separate businesses on an equal footing.
28. When a firm is “acquired,” it means that it has been bought out by another corporation, and the acquired company typically loses its identity. This method is normally done in a cordial manner.
29. 'Slump sale' is a sale wherein you sell an undertaking without taking the values of individual liabilities and assets into account.
30. A takeover often comprises the acquisition of a specified interest in the equity capital of a company (typically between 50 and 100 percent), which grants the acquirer the ability io exert control over the operations of the company.
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31. A takeover, in contrast to a merger or the purchase of an existing division, does not include the transfer of assets and obligations.
32. Takeover and acquisition are same, technically. However, the term takeover generally is used when the transaction is without the consent of the shareholders of the target company or, in other words, it is hostile takeover. Acquisition, on the other hand, refers to an amicable agreement or consent of the majority shareholders of the target company.
33. A takeover or the purchase of a division can also be referred to as a leveraged buyout, which differs in that it is mostly accomplished with the assistance of loan financing.
34. A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a company's core competency.
35. A divestiture may also occur if a business unit is deemed to be redundant after a merger or acquisition, if the disposal of a unit increases the sale value of the firm, or if a court requires the sale of a business unit to improve market competition.
36. A Demerger is the process by which a corporation transfers one or more of its business divisions to another company that is being formed at the same time as the original firm.
37. A carve-out is the partial divestiture of a business unit in which a parent company sells a minority interest of a subsidiary to outside investors. A company undertaking a carve-out is not selling a business unit outright but, instead, is selling an equity stake in that business or relinquishing control of the business from its own while retaining an equity stake. A carve-out allows a company to capitalize on a business segment that may not be part of its core operations.
38. Equity Carveout - When a parent firm engages in an equity carveout, it is selling a portion of its ownership stake in a wholly owned subsidiary. It’s possible that a strategic investor or the general investing public will buy the equity.
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39. Individuals and organisations that are not affiliated with the government, might acquire ownership stakes in previously state-owned businesses through a process known as privatisation. This can either be a partial or complete transfer of ownership.
40. Synergy means the total value of two separate businesses or organisations must be greater than each of their individual values.
41. Economies of scope can be described as producing two or more products simultaneously at a lower cost than producing them individually.
42. Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods.
43. Vertical integration is the merging together of two businesses that are at different stages of production—for example, a food manufacturer and a chain of supermarkets. Merging in this way with something further on in the production process (and thus closer to the final consumer) is known as forward integration.
44. Vertical integration can lead to cost savings by combining the resources of multiple enterprises operating at various stages of a value chain or production process.
45. Vertical integration requires a company's direct ownership of suppliers, distributors, or retail locations to obtain greater control of its supply chain. The advantages can include greater efficiencies, reduced costs, and more control along the manufacturing or distribution process.
46. Two or more resources that can substitute for one another and, when taken together, augment one another, so that the consumer requires less of them when taken together than when taken separately.
47. Antagonistic resources are two or more resources that can substitute for one another, but when taken together some partially offset the effects of others. The consumer requires more of the resources when they are taken together than when they are taken separately.
48. A merger could make sense for two companies if those companies’ resources are complementary to one another.
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49. In finance, an arbitrage refers to the practice of simultaneously buying and selling a securities (or currency) on two or more markets in order to profit from a difference in the prices of those markets in a risk-free way. However, investment bankers and other investors may engage in a different form of arbitrage when they speculate on the stocks of firms that are possible takeover targets. This kind of arbitrage is known as “tail risk arbitrage.”
50. Dividend Discounted (DD) Value Per Share - The current value of the anticipated stream of dividends is what is meant to be represented by the dividend discounted value per share.
51. Discounted Cash Flow (DCF) Value Per Share
The DCF value per share is equal to:
(Firm value using DCF Method - Debt Value)/No. of Equity shares
52. Market Multiple Method - Similar assets should be sold for values that are comparable to one another, according to both common sense and economic reasoning. On the basis of this theory, you can determine the value of a firm by looking at the value placed on other businesses that are comparable to it.
53. The importance of Control Acquiring is that Companies are frequently willing to pay a price that is greater than the worth of the status quo in order to get the right to control the management of the businesses that they are acquiring.
54. The value of control derives from the fact that it enables one to make adjustments that can improve performance.
55. A takeover often entails the acquisition of a certain block of a business’s equity capital, which grants the acquirer the ability to exert control over the operations of the company. In order to obtain full control of the acquired firm, an acquirer typically needs to purchase more than fifty percent of the paid-up equity of the target company.
56. A takeover is referred to as friendly when the current management agrees to be acquired by the acquiring company, and hostile when the management disagrees.
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57, In mergers and acquisitions (M&A) a Creeping Takeover, also known as Creeping Tender Offer, is the gradual purchase of the target company's shares. The strategy of a creeping takeover is to gradually acquire shares of the target through the open market, with the goal of gaining a controlling interest.
58. The provision of Super Majority Clause - In order for a merger to be approved, an extremely high percentage of votes, typically over 80 percent, is required.
59. "Poison pill" is a colloquial term for a defense strategy used by the directors of a public company to prevent activist investors, competitors, or other would-be acquirers from taking control of the company by buying up large amounts of its stock. Poison pills were formally called "shareholder rights plans."
60. Poison Put is an anti-hostile takeover defence tactic. It entails the target company issuing redeemable bonds that can be purchased before they mature. A pre-offer defence technique that is similar to the poison pill tactic is the poison put defence.
61. A Dual-Class Structure means that a company offers two types (or classes) of stocks. The purpose of offering class A and class B stocks, for example, is to differentiate between stocks with different dividend pay-outs and decidedly different voting rights.
62. A Golden Parachute consists of substantial benefits given to top executives if the company is taken over by another firm, and the executives are terminated as a result of the merger or takeover. Golden parachutes are contracts with key executives and can be used as a type of anti-takeover measure, often collectively referred to as poison pills, taken by a firm to discourage an unwanted takeover attempt. Benefits may include stock options, cash bonuses, and generous severance pay.
63. Greenmail is the process in which a buyer acquires a large number of a target company's shares and threatens a hostile takeover but, instead, forces the target company to then buy back their shares at a higher price.
64. In a Pac-Man defense, the target firm then tries to acquire the company that has made a hostile takeover attempt. In an attempt to scare off the would-be acquirers, the takeover target may use any method to acquire the other company, including dipping into its war chest for cash to buy a majority stake in the other company.
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65. Creeping Enhancement - In mergers and acquisitions (M&A) a Creeping Takeover, also known as Creeping Tender Offer, is the gradual purchase of the target company’s shares. The strategy of a creeping takeover is to gradually acquire shares of the target through the open market, with the goal of gaining a controlling interest.
66. A Sale Of Crown Jewels is a last-ditch strategy employed by a company to ward off a hostile takeover or relieve the severe financial stress of a debt burden. A company's best operating assets are sold to raise necessary funds or put off an unwanted bidder desperate to take it over.
67. A White Knight is an investor who is considered friendly to the company as that person acquires the company with the help of the company’s board of directors or top-level management at a fair consideration to protect the company from a hostile takeover attempt by the other potential buyer or bankruptcy.
68. A leveraged buyout is the process of transferring control of a company while primarily using debt as financing. While some leveraged buyouts entail the acquisition of an entire company, others focus on purchasing only a portion of an existing company’s operations.
69. A management buyout is the term used to describe a transaction in which the management of a business unit purchases the business unit outright (MBO). Following the completion of the buyout, the company (or the business unit) will in all likelihood transition into a private company.
70. A Business Alliance is an agreement between businesses, usually motivated by cost reduction and improved service for the customer. Alliances are often bounded by a single agreement with equitable risk and opportunity share for all parties involved and are typically managed by an integrated project team.
71. Acquisitions are afflicted with five sins and unable to integrate successfully,
a) Getting Way Too Far Away From It All
b) Striving for Greatness
c) Plunging without thinking
d) Overpaying
e) Inability to Integrate Well
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72. A Spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.
73. A Split-Up is a financial term describing a corporate action in which a single company splits into two or more independent, separately-run companies. Upon the completion of such events, shares of the original company may be exchanged for shares in one of the new entities at the discretion of shareholders.
74. In case of Equity Carve Outs some shares of the new firm are sold in the market by making a public offer, which results in cash being brought in. To increase their value to shareholders, an increasing number of businesses are turning to equity carve-outs. An initial public offering (IPO) of shares is essentially a partial sell-off and is used by a parent company to bring a subsidiary company into the public eye. The parent business establishes a new publicly traded subsidiary while maintaining a controlling share in the newly traded company itself.
75. A De-Merger is when a company splits off one or more divisions to operate independently or be sold off. A de-merger may take place for several reasons, including focusing on a company's core operations and spinning off less relevant business units, to raise capital, or to discourage a hostile takeover.
76. A Partial Selloff, also known as a slump sale, is the process by which one company transfers ownership of a business unit or asset to another company. It is the equivalent of selling a company unit or a plant, but in the opposite direction. It is a form of contraction when viewed from the standpoint of the seller, but it is a form of expansion when viewed from the perspective of the buyer.
77. Motives for Selloff
a) Raising capital
b) Reduction in monetary losses
c) Adjustments to the strategic alignment
d) Focus
e) Increased productivity
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78. A sell- off might result in an increase in efficiency when the unit that is being sold would be worth more as a component of another company or as a standalone enterprise. This occurs when there is a reverse synergy, which is sometimes referred to as a “energy” in some circles. This indicates that the value of the individual components is higher than the value of the total.
79. A holding company is a corporation that owns the equity of multiple other companies in order to exert influence over those companies. A holding company does not necessarily have to own one hundred percent of the investee business’s equity. In many cases, it is possible for it to exercise effective working control over the activities of another firm with an ownership stake that is as little as 25 percent (or even sometimes lower than this), provided that it is able to manage its relationship with the other shareholders.
80. In merger and acquisition transactions, a mixed offering (also known as a mixed payment) is a form of payment in which an acquirer uses a combination of cash and non-cash payment methods (e.g., equity) to fund the purchase of the target company.
81. An anti-takeover measure is any action taken by a company to prevent it from being acquired by another company. Acquiring companies may wish to purchase a company to reduce competition, increase market share, or to run it better to make it more profitable.
82. A merger is said to be synergistic if the combined value of the companies is greater than the aggregate value ofthe individual companies before the merger
83. Demerger entails dividing a large corporation into multiple independent businesses.
84. Merger that takes place when two companies whose lines of business are completely known as Conglomerate Merger.
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06 Deal Structuring and Financial Strategies
01. As a deal outlines how it will generate value for all the parties involved in M&A transaction, it is very important to structure the deal with extreme care. The process through which it happens is called ‘deal structuring’.
02. A well-structured M&A deal takes into account issues which may arise several years into the future, as also the unforeseen risks impacting the deal. Deal structure and financing are closely interwoven, as establishing a consensus throughout the deal-structuring and negotiation process is crucial for closing the deals.
03. An agreement between two parties (the acquirer and the target firms) specifying their rights and obligations is known as a deal structure. The procedure that leads to the formation of this agreement is referred to as the deal-structuring process.
04. The process of Deal Structuring entails establishing how risk will be distributed and achieving as many Of the major objectives of both the acquirer and the target as possible. The extent to which the acquiring company takes on the liabilities of the target organisation is referred to as risk sharing.
05. The Optimal Structure for the business transaction is one that not only achieves the basic goals of all parties involved while also laying out each party’s rights and responsibilities in a clear and concise manner.
06. The Optimal Structure must take into account an acceptable amount of risk. It is possible that the process may be exceptionally difficult, as it will include a number of different parties, approvals, types of payment, and sources of financing. Choices made in one part of the transaction frequently have repercussions in other parts. The process of containing the risk involved with a complicated transaction is comparable to squeezing one end of a water balloon, which just causes the contents to migrate to another location.
07. The overall consideration, which can come in the form of cash, common stock, or debt, or even a combination of all three of these things, can be considered the method of payment.
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08. The pay-out might be a one-time lump sum, it could be tied to how well the target does in the future, or it could be paid out over an extended period of time. Both the nature of the thing being bought (whether it be stock or assets) and the manner in which ownership is transferred are reflected in the form of acquisition.
09. The corporate structure that is most frequently utilised, is the acquisition vehicle, because it provides the majority of the attributes that buyers want, such as limited liability, flexible financing, continuity of ownership, and transaction flexibility (e.g., option to engage in a tax-free deal).
10. An ESOP structure may be an easy way for small privately held businesses to transfer the owner’s equity in the company to the employees while providing significant tax benefits.
11. A Transaction is considered Taxable to the shareholders of the target company if it involves the majority of the consideration being in the form of cash, debt, or something other than equity.
12. A cash purchase of target assets, a cash purchase of target shares, or a statutory cash merger or consolidation, are all examples of transactions that are subject to taxation.
23. The target company’s tax cost or basis in the acquired assets is increased, or “stepped up,” to its fair market value (FMV), which is equal to the purchase price (less any assumed liabilities) paid by the acquirer.
24. In order to prevent the target company’s shareholders from being subject to double taxation on gains, taxable transactions—that is, transactions that include something other than acquirer stock—require the purchase of the target company’s voting stock. When a company buys an asset, they are required to pay tax on any gain that the company made from selling the asset, as well as another tax if the company pays any of the after-tax earnings to shareholders. Due to the fact that the transaction takes place between the acquirer and the shareholders of the target company, taxable stock purchases do not result in a double taxation. On the other hand, shareholders of the target company can make a profit or a loss through the sale of their stock.
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25. When the primary form of payment for an acquisition is acquirer stock, the transaction is exempt from taxation.
26. Transactions may be subject to partial taxation if the shareholders of the target company receive something other than the acquirer’s stock in exchange for their shares. This non-equity consideration, often known as boot, is typically subject to the same taxation as regular income. There is no automatic increase in the value of newly acquired assets to their Fair Market Value, if the transaction does not trigger any taxes
27. To be exempt from paying taxes, a transaction needs to fulfil the requirements of the step-transaction theory, which requires that it maintain continuity of ownership interests, continuity of business enterprise, and a legitimate business objective. Target shareholders are required to own a significant portion of the value of the combined firms in order to provide evidence of the continuity of ownership interests. This necessitates the majority of the purchase price being comprised of acquirer stock.
28. To demonstrate a long term commitment to the target, the acquirer must show that they w ill continue to operate a large amount of the target’s “historic business assets” in a business in order to meet the requirements of “continuity of commercial enterprise.” In most cases, this indicates that an acquirer is required to purchase “substantially all” of the target company’s assets. In addition, the transaction must serve a legitimate commercial goal, such as increasing the acquiring corporation’s profits to their full potential, rather than serving the sole aim of evading taxes. Last but not least, according to the step-transaction concept, the transaction in question is not allowed to be a component of a wider scheme that would have otherwise constituted a taxable agreement. Deals that do not incur taxes are sometimes referred to as tax-free reorganisations.
29. The conditions of continuity of interests, business enterprise, and step-doctrine are designed to prohibit transactions that more closely resemble a sale from qualifying as tax-free reorganisations. This is accomplished by requiring that the business entity continues to operate.
30. When the amount of minimum alternate tax (MAT) for a company is greater than its normal tax liability, the difference between MAT and normal tax liability is called MAT Credit.
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31. Generally Accepted Accounting Principles (GAAP) (also called the acquisition method). According to the purchase method of accounting, the purchase price or acquisition cost is calculated, assigned first to tangible net assets and then to intangible net assets using a cost-allocation strategy, and then recorded on the books of the purchasing business. Acquired assets less assumed liabilities are referred to as net assets (or net acquired assets). Any difference between the purchase price and the acquired net assets’ fair market value is recorded as goodwill.
32. Goodwill is an asset that represents potential future financial gains from acquired assets that were not specifically recognised. Acquirer must record assets, liabilities, and any non-controlling interest in the target at their fair value as of the acquisition date in accordance with current accounting rules. Instead of the announcement or signing date, the purchase date typically coincides with the closing date.
33. M&A deals are frequently financed using cash, stock, debt, or a combination of all three. The choice of financing source or sources is influenced by a number of variables, such as the state of the capital markets, the liquidity and creditworthiness of the target and acquiring companies, the combined borrowing capacity of the target and acquiring companies, the size of the transaction, and the target shareholders’ preference for cash or acquirer shares. The choice to buy might be made independently of the financing structure of the deal.
34. An acquirer can draw different kinds of investors by decoupling these choices (or clientele).
35. In the case of mergers and acquisitions, a company may issue shares prior to a bid in order to acquire money to finance a cash purchase of a target.
36. The various financing options, available to an acquirer are:
a) Issue of equity and/or preference shares
b) internal accruals
c) long Term loans from banks or other lenders
d) Issue of convertible/non-convertible debentures or other types of domestic or foreign debt instruments.
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37. Deal structure and funding are intertwined, as consensus during deal-structuring and negotiation is key to finalising deals.
38. A "convertible security" is a security—usually a bond or a preferred stock—that can be converted into a different security—typically shares of the company's common stock. In most cases, the holder of the convertible determines whether and when to convert.
39. The Fair Market Value (FMV) is the price an asset would sell for on the open market when certain conditions are met. The conditions are: the parties involved are aware of all the facts, are acting in their own interest, are free of any pressure to buy or sell, and have ample time to make the decision.
40. Tax relief is a reduction in the amount of tax that a person or company has to pay, for example because of expenses associated with their business or property.
41. Cross-border mergers and acquisitions involve assets and operations of firms belonging to two different countries. Acquisition refer to the purchasing of assets or stocks of part or all of another firm (or other firms) that result in operational control of the whole or part of the other firm.
42. Win-win is a situation in which both parties are attempting to find a resolution to a complicated disagreement that is acceptable to both of them
43. When it comes to reaching an agreement on the conditions of the merger, two of the most essential topics are “post-merger control” and the “negotiated price”
44. It is increasingly common for M&A transactions to contemplate deferred contingent payments to sellers, as part of the consideration, when the buyer and seller cannot agree on the value of a target company. This type of payment, which is contingent upon the happening of certain events or the achieving of pre-set targets such as meeting a post-transaction earnings goal is known as Earn Outs.
45. A taxpayer in India, may generally carry forward business losses for a period of up to Eight assessment years succeeding the assessment year in which the loss was first computed.
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Index
Advanced Business & Financial Management (ABFM)
Module D: Emerging Business Solutions
Chapter No
Topic Covered
01
Hybrid Finance
02
Startup Finance
03
Private Equity and Venture Capital
04
Artificial Intelligence
05
Business Analytics as Management Tool
06
Green and Sustainable Financing
07
Special Purpose Acquisition Companies
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01. Hybrid Finance
01. The characteristics of debt and equity which are combined into a single instrument is known as a hybrid security.
02. Hybrid Securities allow for greater flexibility to postpone the payment of debt service compared to traditional forms of debt, and they can be beneficial to all parties involved, including investors, shareholders, and issuers.
03. The equity share capital of a company is the type of capital that represents the investment by promotors and investors who will always have a residual claim on the cash flows and assets of the company and shall also have the managerial control and authority over the company.
04, Debt is often not related with managerial control but does reflect a fixed claim on the cash flow and assets of the company.
05. The two extremes of the finance spectrum are known as equity and debt, respectively. In the middle are hybrid forms of finance, which can be thought of as a combination of equity and debt in their make-up.
06. Preference capital, warrants, convertible debentures, and inventive hybrids are some of the key forms of hybrid financing.
07. The owner of a warrant has the ability, for a limited time and at a predetermined cost, to purchase an agreed-upon number of equity shares in a company at a predetermined price.
08. A debenture that can be converted into equity shares, either in whole or in part, is referred to as a convertible debenture.
09. A convertible bond that is denominated in a foreign currency is a subtype of a convertible debenture, called Foreign Currency Convertible Bond (FCCB).
10, FCCB is an instrument issued outside India but denominated in a different currency.
11. US Dollar is one of the most common currencies used for the Foreign Currency Convertible Bonds.
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12. A hybrid security is considered to be innovative if the reward of the security is connected to some general economic variable such as the interest rate, exchange rate, or commodities index.
13. While there are many types of hybrid securities, the most common are:
Preference Shares
Warrants
Convertible Debentures/Bonds
Foreign Currency Convertible Bonds
Mezzanine Financing
14. Preference shareholders have a higher priority claim on both the company’s income and assets than the equity shareholders have. A dividend is guaranteed to preference shareholders, and this dividend must be paid out before any dividends are distributed to regular shareholders. And there may be cumulative or non-cumulative type of preference shares. The repercussions of failing to pay the dividend on preference shares are not nearly as severe as those of failing to pay, for example, the interest on a debt obligation.
15. Preference shareholders, in contrast to creditors, do not have a legal claim to receive the dividend, which means that they are unable to push the company into bankruptcy if they are not paid. However, in the event that the company is put into liquidation, which involves the sale of all of its assets and the use of the proceeds to settle all of its debts and pay of fits owners, the preference shareholders will receive everything that is rightfully theirs before the equity shareholders receive anything. This prior claim gives preference shareholders an edge in the restructuring of companies that are either struggling financially or have filed for bankruptcy, despite the fact that few enterprises actually end up being liquidated.
16. The term “perpetual or irredeemable preference shares” refers to preference shares that do not have a maturity date.
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17. Cumulative Preference Shares: A cumulative preference share is one that holds the right to a definite sum of dividend or dividend at a predetermined rate. These shares are more valuable than regular preference shares. The name “Cumulative Preference Shares” comes from the fact that the dividend on these shares will continue to accumulate unless they are completely paid out. Till payment is done, the unpaid dividends are recorded as a contingent liability in the company’s balance sheet.
18. In the event that the dividend is delayed for a period of at least two years, the holders of such shares shall be granted the right to participate in and vote on every resolution and every item brought before the general body meeting of the shareholders.
19. Non-Cumulative Preference Shares: A non-cumulative preference share grants the holder the right to receive a dividend payment that is predetermined in advance. If for some reason a dividend is not declared throughout the course of a given year, the right to receive that dividend for that year will be forfeited. As a consequence of this, the owner of such a share will never be eligible to receive dividends in arrears in the future.
20. Participating Preference Shares: In addition to the right to a fixed dividend, these shares give the holder the right to participate in any surplus profits that remain after equity shareholders have been paid dividends at a predetermined rate. This right is granted regardless of whether or not the fixed dividend is paid out. Additionally, in the event that the company is wound up, the holder of this type of share is entitled to receive a predetermined amount of the surplus as well, but only after the equity shareholders have been compensated in full.
21. Non-Participating Preference Shares: A non-participating preference share is a share that only receives a predetermined rate of dividend payment each year and does not get any additional rights in profits or in the surplus when the company is wound up.
22. Redeemable Preference Shares: These shares are issued on the condition that the company will redeem them after the specified period or even earlier at the company’s option. A call option may also be incorporated in this type of shares, giving the company the right to redeem at a specified time and rate.
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23. Non-Redeemable Preference Shares: The preference shares that do not come with an arrangement regarding redemption, are referred to as Non-Redeemable Preference Shares. Irredeemable preference shares can be redeemed by a company only on liquidation or shutting down of operations. However, Indian companies are not permitted to issue irredeemable preference shares.
24. Convertible Preference Shares: The holders of these shares have the right to have them converted into equity shares, at their discretion, in accordance with the terms and circumstances of the issue of which they are a part.
25. Non-Convertible Preference Shares: Anon-convertible preference share is one in which the owner of the preference share does not have the right to have his holdings converted into equity shares. Unless explicitly indicated otherwise, preference shares cannot be converted into common stock.
26. Adjustable-rate Preference Shares: Adjustable-rate preference shares do not qualify for a fi dividend rate. The dividend pay-outs depend on the interest rates prevalent in the market.
27. Redemption refers to the process of repaying an obligation at predetermined times and amounts over the course of its existence. It is a contract that gives the holder the right to redeem preference shares at an agreed upon price either at the conclusion of a specific time period or before the end of that time period. The redemption date, also known as the maturity date, is typically printed on the share certificate, and it indicates the day on which the repayment of the debt is planned to take place.
28. Non-cumulative preference shares - These shares do not accumulate dividends. It is mostly because non-cumulative preference shareholders are paid from the current year's net profits. So, if a company is met with loss in a particular year, the outstanding dividends cannot be claimed by shareholders from future profits.
29. Perpetual Non-Cumulative Preference Shares are issued by Indian banks as part of Additional Tier 1 Capital.
30. A company can use the proceeds from fresh issue of shares to redeem preference shares.
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31. The holder of a warrant has the right but not the responsibility to purchase a predetermined number of equity shares at a predetermined price during a predetermined time period. This right is granted by the warrant. In some cases, warrants are attached to the debt instruments in order to “sweeten” the terms of debt issues. In many cases, the warrants are issued to the promoters, on a preferential basis, to provide them an option to increase their stake in the company within a specified future period.
32. The methods that are used to value options can be used to warrants because a warrant is comparable to a call option on the equity stock of the corporation that is issuing the warrant. The maximum value that a warrant can have is determined by taking the current stock price and subtracting the exercise price from it. The stock price itself determines the maximum value that a warrant can have. The warrant price lies within the parameters established by the lower limit and the upper limit.
33. Black Scholes model is used for valuation of options. As warrant is like a call option, this model can be used for its valuation also. This model takes into consideration five variables viz., volatility, underlying stock price, time, strike price, and risk-free interest rate.
34. Debentures that can be converted into equity shares at the choice of the holder can be issued internationally under the heading of “convertible debentures.” In India, in addition to such debentures, Companies also issue debentures which are compulsorily convertible partly or entirely into equity shares.
35. The conversion ratio, often known as CR, is the most essential characteristic of a convertible asset. This ratio can be defined as the number of equity shares that can be obtained in exchange for one debenture upon conversion. A number that is related to this one is called the conversion price, and it is denoted by the letter P. The conversion price is the price per share that the holder really pays when the conversion takes place.
36. Foreign currency convertible bond (FCCB) is a bond issued in a currency other than the issuer’s domestic currency, i.e., foreign currency. A convertible bond is a hybrid of debt and equity instruments. The holder gets a regular coupon and principal payment, but they also get the option to convert the bond into equity shares.
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37. The conversion rate at which the bonds will be converted to equity is specified in the terms of issue of the bonds. As the holder has the option, if the stock price is below the conversion price on the relevant date, he will not convert the bond into equity shares. FCCB investors are usually hedge funds and foreign investors. These bonds may also have a call option, whereby, the right of early redemption lies with the bond issuer, or put option whereby, the right of early redemption lies with bondholder.
38. Mezzanine Financing is a hybrid type of debt and equity financing. It gives the lender the right to convert the debt in to equity of the company in case of default. Mezzanine financing is normally for raising funds for specific projects or to finance an acquisition. Mezzanine financing can provide higher returns to investors compared to normal debt instruments. However, for the issuing company, its cost is lower than the cost of equity capital Therefore, it can be considered as very expensive debt or cheaper equity. Mezzanine debt is often an unsecured debt. It may be structured with partially fixed and partially variable interest rates. It typically matures in more than five years, depending on the scheduled maturities of existing debt in the books of the issuing company.
39. The formation of a hybrid security involves different combinations of two distinct forms of securities: a conventional debt or equity security and an over-the-counter derivative (a forward contract, or swap, or option).
40. The arrears of dividend payments are distributed to the preference shares, often known as Cumulative preference shares.
41. Preference shares are hybrid financial products with elements of Debentures and Equity Shares.
42. A warrant is a relatively long-term option to buy Equity Shares at a predetermined exercise price over a specified period of time.
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02. Startup Finance
01. Startup refers to a business that is just getting started. Startups are created by one or more business owners who desire to provide a good or service, they feel there is a market for. These businesses typically have large startup expenses and little income, which is why they seek funding from a number of sources, including venture capitalists.
02. The pitch presentation is a slide presentation usually using either Power point or Keynote Slides in the background, that helps the entrepreneur to showcase its business and provide the reasons for which an investor should invest into the business. The pitch presentation came into picture in the late 1990s, during the dotcom boom.
03. Pitch Deck is an intuitive, all-in-all presentation building platform exclusively for start-ups, offered by Startup India. The platform focusses primarily on helping users build their first pitch deck from scratch with next to zero design effort.
04. Business incubators are institutions that support entrepreneurs in developing their businesses, especially in initial stages. These are organizations geared towards speeding up the growth and success of start-ups and early stage companies
05. The Startup India Yatra programme was started with the intention of travelling across Tier 2 and Tier 3 cities in India in search of entrepreneurial talent and with the intention of assisting in the expansion of the startup ecosystem. Its primary objective is to identify prospective business owners living in nonmetropolitan areas and provide them with a venue in which they can pursue their dreams of running their own companies. This will be accomplished by providing them with business incubation and mentoring from well-known institutions in order to assist them in overcoming the constraints posed by the dearth of resources in their region. The objective of the Startup India Yatra is to visit every single district in the country.
06. The Insolvency and Bankruptcy legislation of 2016 provides a framework for the expeditious resolution of insolvency cases involving corporate persons, partnership firms, and individual debtors.
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07. INSPIRE - The objective of the INSPIRE “Innovation in Science Pursuit for Inspired Research” Awards-Manak, which is being run by the Department of Science and Technology (DST) in collaboration with the National Innovation Foundation -India (NIF), an autonomous body of the DST, is to encourage and inspire young people between the ages of 10 and 15 who are currently enrolled in classes six through ten. The program’s objective is to foster an environment that encourages youngsters to think creatively and innovatively by celebrating the planting of one million unique ideas and innovations in the fields of science and societal applications
08. National Startup Award
In accordance with this Plan, the National Startup Award 2021 was initiated. The purpose of this award is to recognise and recognise and reward excellent startups and ecosystem enablers that are contributing to the economic ecosystem by stimulating innovation and injecting competition. This award is in the quest to recognise and reward excellent startups and ecosystem enablers. Startups that are developing ground-breaking technologies or solutions, businesses that are scalable and have a good chance of creating jobs or riches, and ventures that are having a measurable positive effect on society are examples of good candidates. The award show is broken up into different categories, some of which are as follows: providing India with innovative solutions to real problems and challenges; developing innovative technologies, solutions, and products from India to the rest of the world; building businesses that are scalable, sustainable, and responsible; and delivering measurable development gains. The winning startups in the competition received monetary prizes in addition to support from the government. Each candidate received access to an investor link and individualised mentoring.
09. SCO Startup
The SCO (Shanghai Cooperation Organisation) Startup forum is also organised, which is a venue for the stakeholders from the Startup environment from all SCO Member states to communicate and collaborate with the purpose to promote entrepreneurship and innovation to establish knowledge exchange ecosystems and boost scaling prospects by giving solutions in the field of innovation.
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10. Women Capacity Development Programme (WING) offers training and a platform for women-led businesses as part of its capacity development efforts. This is done with the goal of increasing awareness of the project.
11. GEM Startup Runway - The Indian Government has launched a very lucrative platform for the growth of Indian startups, called Government e-Marketplace, more popularly known as GeM. This is indeed a very fair & transparent interface for empowering the small traders and manufacturers of India.
Today, a small trader or manufacturer can easily obtain a GeM registration in his business name. Thereafter, he can get access to the wide interface for selling the products & services to the prominent buyers from the Government sector or the PSUs, who urgently require such supplies.
The buying & selling of the supplies takes place through the process called Public procurement.
For the budding startups, the government has begun a new initiative on the GeM portal called GeM Startup Runway.
12. Innovation Zones
The government is establishing Innovation Zones at the level of Urban Local Bodies (ULBs) in order to enhance the basic level of public service delivery and governance. This is done in order to improve the overall quality oflife for citizens and to handle local problems in the areas of sanitation, cleanliness, health, trash, water, taxation, traffic, enforcement, and any and all other facets of citizen services supplied by ULBs.
13. Startup India Showcase
The most promising new businesses to emerge from India’s startup scene are featured in the form of virtual profiles on an online discovery platform called as Startup India Showcase. It was launched on the 16th of January 2016, There have been innovations in many different fields, including finance technology, enterprise technology, social impact technology, education technology, and health technology, amongst others.
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14. Digital Demo Day - The Digital Demo Day is a conference and display for new technology companies who are just getting started in Germany. It provides a platform for industrial tech startups, primarily in the fields of virtual reality (VR), augmented reality (AR), internet of things (loT) cyber security, smart devices, drones, and robotics, to showcase their digital technologies for people to test out and get in touch with. It honours inventiveness by bringing together colleges, corporations, small and medium-sized businesses, and startups, all of which are searching for chances in digital transformation. A trip to Germany was taken for the purpose of exposure, and there, at the Digital Demo Day, a few entrepreneurs took part.
15. Animal Husbandry Startup Grand Challenge was initiated by the Department of Animal Husbandry and Dairying in collaboration with Startup India. The first edition of the same publication was released by the Prime Minister in 2019, and the second edition of the same publication was released by the Prime Minister in 2021 during an event marking National Milk Day in Anand, Gujrat. The purpose of the competition is to encourage the development of novel and practical approaches to resolving challenges and issues that are prevalent in the animal husbandry and dairy industries.
16. Ayushman PMJAY Startup Grand Challenge - In cooperation with Startup India, the Ayushman PMJAY Startup Grand Challenge is extending an invitation to India’s newest businesses to develop innovative solutions for the National Health Authority Support for Ayushman Bharat Jan Arogya Yojana’s efficient Implementation. The challenge consists of inviting startups that are primarily working in the fields of medical devices, digital health, hospital services, hospital management, health communication, medical workforce training and capacity building, and reducing the cost of operations, amongst other fields.
17. Textile Grand Challenge
In addition, the initiative resulted in the beginning of the Textile Grand Challenge. India is a significant participant in the global textile and clothing manufacturing industry. It is anticipated that by the year 2025, the global market for garments made from textiles will reach $ 1.3 trillion. In a similar vein, it is anticipated that the domestic market for garments will reach 59.3 billion dollars by the year 2022.
The primary objective is to introduce innovation into the sector of concern, which will, in the long run, contribute to the industry’s expansion.
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18. Innovation Challenge
An Innovation Challenge was launched with the goal of developing a Portable Device for Water Quality Testing. This innovation challenge was launched by the Department of Drinking Water and Sanitation’s National Jal Jeevan Mission (NUM) in collaboration with the Department of Drinking Water and Information Technology. Both surface water and groundwater are used as sources of potable water in rural regions, with groundwater accounting for 80% of the total. However, because there is a limited amount of groundwater available, particularly in dry and semi-arid regions, there has been an increase in the consumption of surface water.
19. MNRE Startup Grand Challenge
An MNRE startup grand challenge has been kicked off to achieve the goal of lowering carbon emissions while also ensuring energy security and access. The possibilities that are now available aim to investigate the potential for bigger contributions from renewable resources in the fields of livelihood, health, water, and innovation in products, services, and business models. The Ministry of New and Renewable Energy (MNRE) offers a one-of-a-kind opportunity for innovative businesses and entrepreneurs to solve some ofthe most pressing problems that the Renewable Energy Sector in India is now facing.
20. Startup India Single Use Plastic International Challenge
Because single-use plastics, also known as disposable plastics, are only used a single time before being thrown away or recycled, government of India has created the Startup India Single use plastic International Challenge in order to encourage inventors and startups to develop design solutions.
21. The term “funding” refers to the sum of money that is necessary to begin and continue operating a business for the purposes of product creation, manufacturing, expansion, sales and marketing, inventory, and office spaces.
22. The Startup India Seed Fund Scheme’s primary mission is to aid new businesses in India in establishing a proof of concept, developing prototypes, breaking into new markets, conducting product tests, and going into business. This would make it possible for the businesses to advance to a level where they are able to solicit financial backing from angel investors or venture capitalists, as well as seek loans from commercial banks or other financial institutions.
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23. Equity Financing:
It comprises selling equity shares of the company in exchange for the capital that was provided. In the case of equity financing, there is no requirement to make any payments toward the principal.
24. Grant
A grant is an incentive, typically financial, that is granted by one organisation to another organisation in order to promote the achievement of a goal or to encourage superior performance. A grant does not call for any sort of payback of the monies.
25. Idea Phase
At this point, the entrepreneur has the business concept in their head and is working to turn it become a reality. At this point in the process, the quantity of money that is required is relatively low. In addition, when a business is in its early stages of operation, there are very few avenues and sources via which cash can be raised and financed. At this point in time, most of the money that is needed to be raised can come from unofficial sources.
26. Growing a company using only one’s own resources and refusing any outside investment is an example of “bootstrapping.” It involves basing both the operation of the firm and its growth on the profits and savings generated by it. Because there is no obligation to pay back the cash or to dilute control of the firm, this is the first choice that the vast majority of entrepreneurs choose. Due to the inherent level of trust that exists between investors and business owners, many entrepreneurs also turn to their friends and family for financial assistance. Even the financial backing can be acquired in the form of a prize or reward at a pitching event, which are offered by institutes or organisations that oversee business plan competitions and challenges. Even though the amount of money is not very large, it is typically enough to go through the phase of idea development.
27. Seed Stage
A company is required to carry out field trials, test the product on a select number of clients, bring on board mentors, and build a formal team before it is eligible to investigate the following funding sources.
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28. Incubators are organisations that have been established with the specific purpose of assisting entrepreneurs in the process of constructing and launching their enterprises.
29. Angel Investors are private individuals that put their money into high-potential enterprises in exchange for a share of the company’s ownership.
30. Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms. Crowdfunding is most often used by startup companies or growing businesses as a way of accessing alternative funds.
31. Series A Stage - At this point in the process, monies are being raised so that the company can develop its user base, product offerings, extend to other geographies, and so on. :
32. Venture capital funds are pools of money that are managed by professionals and are dedicated to making investments in companies with rapid development.
33. Venture capitalists want start-up companies to give them ownership in exchange for their investment, and they often provide active mentoring to the startups in which they have invested.
34. Scaling refers to the trading strategy of buying multiple orders at different prices so as to limit the impact of putting in one big order.
35. An exit option is a stipulation within a business plan or project that allows a company to discontinue the plan with limited financial consequences. An exit option can typically be exercised after pre-stated key developments have occurred within a project or business plan.
36. A company that is still in its early stages and looking for a business strategy that is both feasible and scalable is referred to as a startup.
37. SWAYATT is a government initiative to promote Start-ups, Women and Youth Advantage Through eTransactions on Government eMarketplace (GeM).
38. An ESOP is an employee benefit plan that enables employees to own part or all of the company they work for. ESOPs are most commonly used to facilitate succession planning, allowing a company owner to sell his or her. shares and transition flexibly out of the business.
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39. Seed funding or angel investing is the funding of a business at the earliest stage in its life cycle, which is usually anytime during its formation at the idea stage, having just a plan, prototype, or in a trial phase, with no or negligible customers.
40. Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or need funds for a long-term project that promotes growth. By selling shares, a business effectively sells ownership in its company in return for cash.
41. When a company borrows money to be paid back at a future date with interest it is known as debt financing. It could be in the form of a secured as well as an unsecured loan. A firm takes up a loan to either finance a working capital or an acquisition.
42. The project initiation phase is the first stage of turning an abstract idea into a meaningful goal. In this stage, you need to develop a business case and define the project on a broad level. In order to do that, you have to determine the need for the project and create a project charter.
43. In the Funding Life Cycle, once an idea has surpassed the concept stage the next stage of a new venture is known as the “Seed Stage”. During this early stage, entrepreneurs approach investors including friends, family, and angel investors to find financial support for their concept or product. These investors typically initiate a high-level investigation of the technical, market and economic feasibility of the opportunity. If the entrepreneur finishes the seed stage, they progress into “Early Stage“. Following the early stage is the growth stage, then mezzanine being the last ultimate stage.
44. The Series A Stage is the second stage of startup financing and the first stage of venture capital financing. Similar to seed financing, series A financing is a type of equity-based financing. This means that a company secures the required capital from investors by selling the company's shares.
45. A 'Fund Of Funds' (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. An FOF Scheme of a primarily invests in the units of another Mutual Fund scheme. This type of investing is often referred to as multi-manager investment.
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46. Creativity and originality must be a key competency for a startup in order to be successful.
47. Plug-and-play facilities and other common services are examples of what are referred to as “common services” within the context of an infrastructure that aids entrepreneurs in the early stages of the start-up life cycle. These are known as Incubators.
48. Valuation is used as one of the yardsticks to evaluate the success of new businesses.
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03. Private Equity and Venture Capital
01. Venture capitalists flourish in the high-risk environment that traditional financial institutions avoid.
02. Venture capitalists are willing to provide financial backing to very new businesses that have no assets and likely to do business with people with little or no prior expertise as well. Instead of providing financial assistance in the form of a loan, the investors demand a share of the company as compensation for the risk they are taking, so that they can take a greater percentage of the upside, which means they can get a portion of the profits that will be made in the future.
03. Venture capital consists of financial backing in addition to strategic guidance on how to create enterprises, making it more beneficial to business owners.
04. The venture capitalist has an exit strategy in place for his or her investment in the business being aided after three to seven years. In most cases, the promoter of the company, that is receiving assistance, has the first option to purchase the equity investment that is being held by the VC.
05. A private equity investment might be used by the investee company to restructure either its finances or its operations.
06. Private equity investors typically put their money into established businesses in their later stages of development that have a proven track record.
07. Private equity investors place a greater premium on good corporate governance, whereas various venture capital investors devote more of their attention on management capability.
08. A private equity investment deal may incorporate debt, which is unusual for a venture capital investment deal.
09. The following are the three primary forms of venture capital financing:
a) Financing for the Initial Stages of Development
b) Financing for Expansion
c) Acquisition Financing
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10. A second round of financing, often known as an operational capital injection, given to early stage enterprises that are selling items but are not yet generating a profit.
11. The third round of financing, also known as a mezzanine financing, is when a company receives the funding necessary to expand after experiencing recent financial success.
12. The fourth round of funding is sometimes referred to as bridge financing, and it comprises financing for the process of becoming public.
13. Screening is the process by which a venture capitalist investigates and evaluates all of the potential ventures in which he may invest his money.
14. Limited Partners (LPs) are the term used for investors in venture capital firms. LPs are individuals or institutions that have already put money into the funds managed by the venture capital firm in which they are now investing. Endowments, corporate pension funds, sovereign wealth funds, funds of funds, and affluent families are all examples of limited partnerships (LPs).
15. A general partner (known as a "GP") is a manager of a venture fund. GPs analyze potential deals and make the final decision on how a fund's capital will be allocated. General partners get paid through management fees, carried interest, and distributions from the fund.
16. Deal flow is a term used by investment bankers and venture capitalists to describe the rate at which business proposals and investment pitches are being received. Rather than a rigid quantitative measure, the rate of deal flow is somewhat qualitative and is meant to indicate whether business is good or bad.
17. Hurdle Rate is the minimum annual return, measured as an internal rate of return (IRR), that is required to guarantee for LPs. If the fund is unable to achieve this rate of return, it is considered to be unsuccessful (and a lot of VC funds fail). Rajan constructs a financial model in Excel in order to compute the anticipated returns and determine the required rate of return. The barrier rate will be affected both by the sectors that are the primary focus and the stage of investment.
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18. D2C venture capital is great if a brand is looking at expansion or acquisition but is not advisable for recurring expenses like inventory, marketing, and operations. Therefore, banks are no longer a factor for D2C funding in India, and accepting private investment requires giving up significant ownership.
19. Voting rights clauses are needed for significant business decisions such as when to go public or when to sell the company.
20. Anti-dilution clauses: In the event that the business secures the subsequent round of funding at a lower value, the number of shares owned by the fund will be changed in such a way that the fund continues to own the same percentage startup as it did prior to the round.
21. Carry, also called carried interest, is a form of performance-based compensation that aligns with investor interest so that general partners find outperforming deals. Carry is the share of profits from an investment that is paid out to general partners at a VC firm. Much like equity at a startup, venture capital firms utilize carry to compensate and incentivize their GPs. Though there are numerous other ways that GPs can also get compensated, often a large percentage comes from carry. Whether you’re a founder or thinking of becoming an investor, it’s good to know how carry works at a VC firm.
22. There is a correlation between high risk and high rewards. When compared to the return that public equity markets generate (12-15%) and far greater than the return that debt markets give (8-10%), venture capital is predicted to generate a return in the range of 25-35% annually.
23. A non-publicly traded form of capital is known as private equity, and it belongs to the alternative investment class known as “alternative investments.”
24. Private equity is comprised of funds and investors that either directly invest in private enterprises or that engage in buyouts of public corporations, which ultimately results in the delisting of public stock.
25. Private equity funds in India are organised as trusts and registered with the Securities and Exchange board of India as alternative investment funds in accordance with the Securities and Exchange board of India (Alternative Investment Funds) Regulations, 2012.
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26. Private equity funds can also be established in the form of companies or limited liability partnerships, in addition to trusts (LLP).
27. Category I AIFs - AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.
28. Category II AIFs - AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
29. Category III AIFs - AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs
30. Angel Fund is a sub-category of Venture Capital Fund under Category I Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of AIF Regulations.
31. “Angel investor” means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely,
(a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:
(i) has early stage investment experience, or
(ii) has experience as a serial entrepreneur, or
(iii) is a senior management professional with at least ten years of experience;
(‘Early stage investment experience’ shall mean prior experience in investing in start-up or emerging or early-stage ventures and ‘serial entrepreneur’ shall mean a person who has promoted or co-promoted more than one start-up venture.)
(b) a body corporate with a net worth of at least ten crore rupees; or
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(c) an AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996. Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than Rs. 25 lakh from an angel investor.
32. SEBI (Alternative Investment Funds) Regulations, 2012 were introduced to establish a standardised framework for the governance of private pools of funds and investment vehicles in order to facilitate the more efficient distribution of funds.
33. A Private Equity Fund” means an Alternative Investment Fund which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund.
34. “Due Diligence” refers to the investigation or research that is often carried out by a company that is in the process of acquiring another business.
35. Equity dilution occurs when a company issues new shares to investors and when holders of stock options exercise their right to purchase stock. With more shares in the hands of more people, each existing holder of common stock owns a smaller or diluted percentage of the company.
36. Carry-forward balances (or carry-forward funds) are unexpended balances at the end of the year. Generally, these balances are calculated as current year budget appropriation and prior year balances, less current-year expenditures. For self-supporting, auxiliary, and other revenue-generating activities, carry-forward balances are calculated against actual revenue generated.
37. Deal Negotiation (Contract negotiation) is the process of coming to an agreement on a set of legally binding terms (here, we'll focus on negotiation between two companies). When two companies negotiate, both parties seek to obtain favourable terms and minimize financial, legal and operational risk.
38. An Exit Strategy or Exit Plan is a contingency plan executed by an investor, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria have been met or exceeded.
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39. A Non-Disclosure Agreement is a legal contract or part of a contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to.
40. A secondary buyout refers to when an investment is made in an existing private equity-backed company. It can sometimes be a necessary step in unlocking a business's potential and can help the incumbent investor to realise the value of their investment.
41. Recapitalization is the process of restructuring a company's debt and equity mixture, often to stabilize a company's capital structure. The process mainly involves the exchange of one form of financing for another, such as removing preferred shares from the company's capital structure and replacing them with bonds.
42. A brand-new endeavour started by IIT and IIM Passouts involving cutting-edge technology will be associated with venture capital
43. In most cases, the lifespans of private equity funds are predetermined to be around 10 years
44. The method by which a Venture Capital Fund will realise its investment in a firm is known as Exit Route
45. Venture Capital Investment is required by Entrepreneurs who have Innovative Concepts.
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04. Artificial Intelligence
01. The term “artificial intelligence” (Al) refers to the replication of human intelligence in computers that have been trained to think like people and emulate the activities that humans engage in.
02. The phrase “artificial intelligence” can also be used to refer to any type of computer that simulates mental processes common to humans, such as learning and problem-solving.
03. The concept of artificial intelligence can be conceptualised as a computer-controlled robot designed to look and behave just like a human person.
04. In its most basic form, artificial intelligence is a process in which computer vision is used to conceptualise objects and the ROBOTICS process is used to control the objects and move them around.
05. Alan Turing, a mathematician from the United Kingdom, is credited with being the first person to suggest a test to assess whether or not a machine is intelligent. In what would eventually be known as the Turing Test, a machine plays an imitation game in which it attempts to pass itself off as a human being by responding to a series of questions in a manner that is consistent with how a person would respond. Turing held the belief that a machine could be judged to have the same level of intelligence as a human being provided it could convince a person that they were having a conversation with another human being when in reality they were not.
06. John McCarthy, a professor at the Massachusetts Institute of Technology, is credited with being the one who first coined the term “artificial intelligence” in 1956.
07. Google has made immense contributions to the field of Artificial Intelligence over a period of time.
08. Utilising Al-based systems allows for increased productivity, which in turn leads to cost savings, as well as the ability to make decisions utilising information that is unavailable to human decision-makers.
09. Chatbots offer a very high return on investment (ROI) in terms of cost savings, which is one of the reasons why they are one of the most widely employed applications of Al across all sectors.
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10. Chatbots are able to efficiently handle the majority of the tasks that are frequently accessible, such as checking account balances, viewing micro statements, making fund transfers, and so on. This serves to relieve some of the strain placed on other channels, such as customer service call centres, internet banking, and so on.
11.Robo Advice - Within the realm of financial services, one of the most contentious debates is the use of automated guidance. The goal of a robo-advisor is to gain an understanding of a client’s financial health by evaluating the data that the client provides, in addition to the client’s financial history.
12. Predictive Analytics with a General Purpose Focus - General-purpose semantic and natural language applications as well as extensively applicable predictive analytics are examples of one of the most prevalent use cases for artificial intelligence.
13. Artificial intelligence has the ability to recognise specific patterns and correlations hidden within the data that older technologies were unable to recognise. These patterns could imply unmet sales prospects, potential to cross-sell products, or even measures based on operational data, all of which could have a direct impact on the company’s income.
14. Cybersecurity - Al has the potential to dramatically increase the efficiency of cybersecurity systems by utilising data from previously experienced threats and learning the patterns and signs that might initially appear to be unconnected in order to forecast and thwart assaults.
15. Al may monitor internal risks or breaches and advise remedial steps, which can result in the prevention of data theft or abuse. This can be done in addition to preventing external threats from occurring.
16. Analysing data from a wide variety of traditional and non-traditional data sources is one of the most important roles that Al plays in the process of assisting alternative lenders estimate the creditworthiness of clients. Even for those people or companies with a low credit history, this makes it easier for lenders to design new systems for lending that are supported by a comprehensive credit rating model.
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17. A software system known as a Hybrid Information System is created by combining various artificial intelligence methodologies and techniques, such as a fuzzy expert system, a neuro-fuzzy system, and a genetic-fuzzy system. This results in the construction of the hybrid information system.
18. An efficient learning system, also known as an HIS system, is one that not only combines the beneficial aspects of various learning paradigms and representations, but also over comes the limitations of processing capabilities. These systems are also utilised for the purpose of finding solutions to issues that arise in a variety of contexts.
19. A neural network is a method in artificial intelligence that teaches computers to process data in a way that is inspired by the human brain. It is a type of machine learning process, called deep learning, that uses interconnected nodes or neurons in a layered structure that resembles the human brain.
20. Ktesibios of Alexandria is credited with building the earliest self-controlling machine, which was a water clock that had a regulator that kept a steady flow rate. This was about the year 250 B.C.
21. The definition of what an artefact is capable of doing was shifted as a result of this creation. In the past, only living organisms had the ability to adjust their actions in reaction to shifts in their surrounding environment.
22. Norbert Wiener is widely regarded as the seminal figure in the development of what is now known as control theory (1894-1964).
23. The public’s awareness that artificially intelligent machines might be possible was sparked by Wiener’s best-selling book Cybernetics (1948), which was published the previous year.
24. The purpose of contemporary control theory, in particular the subfield of the field known as stochastic optimum control, is to design systems with the intention of maximising an objective function over time.
25. The study of rational agents is what’s meant to be encompassed by the term “artificial intelligence.”
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26. A rational agent could be anything that makes decisions, including a person, company, machine, or even a piece of software. After taking into account the agent’s previous and current perceptions (that is, the agent’s perceptual inputs at a particular instant), it performs an action that will result in the best possible outcome.
27. An Al system consists of an agent and the environment in which it operates. The agents behave in accordance with their surroundings. It’s possible that the environment has other agents in it.
28. An agent’s surroundings are their environment, which includes everything in the world outside of the agent but does not include the agent itself. The presence of an agent in a certain circumstance is one definition of what constitutes an environment.
29. The environment is where the agent lives and operates, and it gives the agent something to detect so that it can respond appropriately to the environment. It is common to refer to an environment as being non-feministic.
30. An intelligent agent that is capable of planning creates a representation of the current state of the world, makes predictions about how their actions will change the environment, and makes decisions that maximise the utility (or “value”) of the available options.
31. In the learning method known as reinforcement, the agent is rewarded for appropriate replies and disciplined for inappropriate ones. The agent will organise its responses into categories in order to formulate a plan for navigating the issue space it faces.
32. Transfer learning is when the skills learned to solve one problem are utilised to solve a completely different challenge. Learners can be evaluated using computational complexity, sample complexity (how much data is needed), or other conceptions of optimization, according to computational learning theory.
33. Robotics makes extensive use of Artificial Intelligence today. Robots use localization to map their surroundings and determine where they are in the world. It is simple to perform this in a contained space that is not moving and is clearly visible; nevertheless, the task is more difficult in dynamic environments, such as the interior of a patient’s body while they are breathing (during an endoscopic procedure).
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34. The process of reducing a movement job to its “basic” components, such as individual joint movements, is referred to as motion planning.
35. Compliant motion is a type of movement that involves moving while retaining physical touch with an object. This type of movement happens rather frequently. Robots have the ability to gain knowledge through experience and figure out how to operate effectively in spite of friction and gear slipping.
36. The tools and techniques used by Artificial Intelligence are as under:
Search and Optimization
Logic
Probabilistic Methods for Uncertain Reasoning
Classifiers and Statistical Learning Method
37. “Artificial intelligence” (Al) refers to machines that have been educated to think like people and mimic human behaviour. “Artificial intelligence” refers to computers that replicate human mental functions like learning and problem-solving. Al is a computer-controlled robot that looks and acts like a human.
38. Al is used in finance, healthcare, institutes, surveillance, and social media. Most interesting about Al is the idea of creating computer programmes with fully developed minds like humans. Making intelligent machines that can perform activities formerly done by humans or other machines.
39. Artificial intelligence is the creation of a computer with an artificial brain that can do human-like tasks.
40. Al uses computer vision to conceptualise objects and ROBOTICS to control and move them. Artificial intelligence research is the study of concepts to develop computers that respond to stimulation in a way compatible with human reflection, judgement, and intention. Each machine should self-evaluate and choose diverse ideas. Due to human talent and labour, these robots should behave with life, spirit, and sensitivity; however, they are only duplicates.
41. Educators and cognitive scientists have proposed intelligent computer assisted instruction (CAI), in which a computer would be designed to function as a “tutor” and watch a student’s problem-solving efforts. Educators and cognitive scientists have proposed this.
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42. Machine learning (ML) is a subfield of Artificial Intelligence that deals with systems that are able to acquire their own 'knowledge' ("learn") by extracting patterns from data instead of having those patterns provided to them directly via programming.
43. Deep learning is a method in artificial intelligence (AI) that teaches computers to process data in a way that is inspired by the human brain. Deep learning models can recognize complex patterns in pictures, text, sounds, and other data to produce accurate insights and predictions.
44. Robotics is a branch of engineering that involves the conception, design, manufacture and operation of robots. The objective of the robotics field is to create intelligent machines that can assist humans in a variety of ways. Robotics can take on a number of forms.
45. Google RankBrain is a system by which Google can better understand the likely user intent of a search query. It was rolled out in the spring of 2015, but not announced until October 26 of that year.
46. Kubeflow is an open-source platform for machine learning and MLOps on Kubernetes introduced by Google.
47. AI Platform Pipelines helps you implement MLOps by providing a platform where you can orchestrate the steps in your workflow as a pipeline. ML pipelines are portable and reproducible definitions of ML workflows.
48. Hold for Me refers to protect or monitor something for someone else, often in their absence.
49. Hold for Me is a Google phone feature that will listen to the other side of the phone call (it doesn’t listen through your microphone) and identify when a customer service agent has picked up the phone, at which point it will ring to let you know that you can continue the call.
50. A Chatbot is a computer program that simulates and processes human conversation (either written or spoken), allowing humans to interact with digital devices as if they were communicating with a real person.
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51. A classifier in machine learning is an algorithm that automatically orders or categorizes data into one or more of a set of “classes.” One of the most common examples is an email classifier that scans emails to filter them by class label: Spam or Not Spam.
52. Robo-advisors are a class of financial adviser that provide financial advice and investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms.
53. Cyber security is the application of technologies, processes, and controls to protect systems, networks, programs, devices and data from cyber attacks. It aims to reduce the risk of cyber attacks and protect against the unauthorised exploitation of systems, networks, and technologies.
54. Cybernetics is concerned with circular causal processes however they are embodied, including in ecological, technological, biological, cognitive and social systems and also in the context of practical activities such as designing, learning, managing, etc. Its transdisciplinary character has meant that cybernetics intersects with a number of other fields, leading to it having both wide influence and diverse interpretations.
55. Statistical Learning Method is a set of tools for understanding data. These tools broadly come under two classes: supervised learning & unsupervised learning. Generally, supervised learning refers to predicting or estimating an output based on one or more inputs.
56. “Artificial Intelligence” refer to the field of study known as artificial intelligence works toward the creation of intelligent machines.
57. Language understanding and problem-solving is an example of a field that has benefited from the application of artificial intelligence.
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05. Business Analytics as Management Tool
01.Business analytics (BA) refers to the combination of skills, technologies, and practices that are used to analyse the data and performance of an organisation in order to gain insights and make decisions in the future, that are driven by data.
02. Statistical analysis is one of the most common methods used in business analytics.
03. The objective of business analysis is to determine which datasets are valuable and which have the potential to boost revenue, productivity, and efficiency.
04. When applied appropriately, BA may be used to make accurate predictions of future events that are related to the activities of consumers, and trends in the market. It can also help create more efficient operations, which could contribute to an increase in revenue, if it is used to its full potential.
05. During late 1980s and early 1990s, data warehousing, business intelligence, and analytics technologies began to develop. These innovations provided an enhanced capability to evaluate the ever-increasing amounts of data that organisations were creating and gathering.
06. By the year 1995, when the First International Conference on Knowledge Discovery and Data Mining was held in Montreal, the phrase “data mining” was already in common usage.
07. The Association for the Advancement of Artificial Intelligence (AARI), which also hosted the conference on an annual basis for the subsequent three years, was the organisation that was responsible for sponsoring the event. The conference, which has been held annually since 1999 and is commonly referred to as KDD 2021 and so on, is primarily coordinated by Special Interest Group on Knowledge Discovery in Data (SIGKDD), which is part of the Association for Computing Machinery that focuses on knowledge discovery and data mining.
08. BA is most commonly used to:
a) Analyse data coming from a range of different sources. Anything from cloud applications to marketing automation tools and customer relationship management software could fall under this category.
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b) Find patterns within the data sets by employing more complex analytics and statistical methods. These patterns can assist you in predicting future trends and providing you with new information regarding consumers and the behaviours they engage in.
c) Keep an eye on key performance indicators (KPIs) and trends as they evolve in real time. Because of this, it is much simpler for companies to not only store all of their data in a single location but also draw correct and speedy conclusions from those data.
d) Back and support decisions based on the most recent available facts. Because BA gives us access to such a large amount of data that we can put to use in support of business decisions, we can be certain that we are well-informed not only for one but also for multiple distinct scenarios.
09. There are four primary approaches to business analysis, and each one is put into practise in succession, beginning with the least complicated. When you apply these four different types of analytics, your data can be cleansed, examined, and digested in such a way that makes it feasible to produce answers for any difficulties that your organisation may be facing.
10. Descriptive analytics involves the interpretation of historical data and key performance indicators to discover patterns and trends. Using methods such as data aggregation and data mining, this makes it possible to get a comprehensive view of events that have occurred in the past as well as those that are occurring at the present time.
11. Diagnostic analytics focuses on previous performance to understand which factors drive particular trends. This can be accomplished through the use of drill-down, data discovery, data mining, and correlation to uncover the reasons behind particular occurrences. After arriving at a knowledge of the likelihood of an event and the reasons why an event may occur, algorithms are utilised for classification and regression.
12. Predictive analytics is the practice of applying statistics to estimate and evaluate future outcomes by employing statistical models and techniques derived from machine learning. It is common for sales and marketing teams to employ this type in order to forecast the opinions of specific clients based on data collected from social media.
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13. Prescriptive analytics - This approach makes use of data on previous performance to make recommendations for how similar situations should be managed in the future. This particular kind of business analytics not only forecasts results, but it also has the ability to make suggestions regarding the particular activities that need to take place in order to get the greatest potential conclusion. Deep learning and sophisticated neural networks are frequently used to accomplish this goal.
The purpose of this type of business analytics is often to match different solutions to the immediate requirements of a customer.
The current state of the company’s operations will play a significant role in determining which approach to pursue.
14. The various elements of business analytics are as follows:
a) Data Mining
b) Text Mining
c) Data Aggregation
d) Forecasting
e) Data Visualisation
15. Data mining is the process of searching through big data sets in order to find patterns and relationships that, when analysed, can assist in the resolution of issues that arise in commercial enterprises. Enterprises now have the ability to forecast future trends and make better informed business decisions thanks to the methodologies and tools for data mining.
16. The process of extracting meaningful information from data sets is known as “data mining,” and it is one of the fundamental disciplines that make up “data science.” Both of these terms refer to the application of advanced analytics methods. At a more granular level, data mining is a step in the knowledge discovery in databases (KDD) process, which is a data science approach for obtaining, processing, and analysing data. KDD is an acronym for knowledge discovery in databases.
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17. Data mining and knowledge discovery and data mining are two different concepts, despite the fact that they are sometimes used interchangeably.
Data mining that is done well can be of assistance in the planning and management of numerous elements of corporate operations and strategies.
18. The process of data mining can be split down into four basic steps, which are as follows:
a) Data collection:
b) Data preparation:
c) The Data Mining Process:
d) The interpretation and analysis of the data:
19. A common data mining use case that is enabled by multiple techniques is pattern recognition.
20. Anomaly detection, which seeks to identify outlier values in data sets, is another data mining use case that is enabled by multiple techniques.
21. Clustering is a part of the data mining applications, the data elements that have certain characteristics in common are grouped together into clusters.
22. Regression is calculating predicted data values based on a set of variables is another method that can be utilised in the process of discovering relationships hidden within data sets.
23. in Sequence and path analysis Data can also be mined to look for patterns in which one set of events or values leads to later ones. This type of pattern can be used to predict future events.
24. Information retrieval, also known as IR, is the process of locating and delivering pertinent data or documents based on a predetermined list of queries or phrases.
25. Tokenization refers to the process of separating a lengthy piece of text into individual sentences and words that are referred to as “tokens.” After that, these are incorporated into models, such as bag-of-words, that are used for text clustering and document matching activities.
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26. Stemming is the process of removing prefixes and suffixes from words in order to determine the form and meaning of the root word. This is referred to as “stemming.” This method decreases the amount of space required for indexing files, which results in improved information retrieval.
27. Natural Language Processing is an offshoot of computational linguistics that draws on techniques from a variety of fields, including computer science, artificial intelligence, linguistics, and data science, to give computers the ability to comprehend spoken and written forms of human language.
28. Summarization is a method that condenses lengthy passages of text into a concise and logical overview of the most important aspects of a document. This method provides a synopsis of the text.
29. Part-of-speech (PoS) tagging is a method in which a tag is assigned to each token in a document based on the part of speech that the token denotes, such as nouns, verbs, adjectives, and so on.
30. Text categorization: This task, which is also known as text classification, is responsible for analysing text documents and classifying them based on predefined topics or categories. In other words, this task is responsible for text classification. When it comes to classifying synonyms and abbreviations, this subsidiary task is especially useful.
31. Sentiment analysis is a task that identifies positive or negative sentiment from internal or external data sources. This gives you the ability to monitor changes in customer attitudes over the course of time. It is frequently utilised to provide information about people’s opinions regarding various brands, products, and services.
32 . The Extraction of Information - When searching through a variety of documents, information extraction (IE) brings to the surface the pertinent pieces of data. In addition to this, the emphasis is placed on the extraction of structured information from free text and the storage of information regarding entities, attributes, and relationships in a database. The following are examples of common information extraction sub-tasks:
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33. Feature Selection: The process of selecting the important features (dimensions) that will contribute the most to the output of a predictive analytics model is referred to as feature selection, which is also known as attribute selection.
34. Feature Selection: The process of selecting a subset of features in order to improve the accuracy of a classification task is referred to as feature extraction. This is of utmost significance when attempting to reduce the number of dimensions.
35. Named-entity recognition, also known as entity identification or entity extraction, seeks to locate and classify particular entities in text, such as names or locations. This can be accomplished by searching for and analysing the text. For instance, NER recognises “Mary” as a female name and “California” as the name of a place in the world.
36. Data Aggregation - The process of collecting raw data and presenting it in a summary format for the purposes of statistical analysis is referred to as data aggregation.
37. Granularity is defined as the time frame during which individual data points for a specific resource or collection of resources are gathered for the purposes of aggregation. Granularity can range anywhere from one minute to one month, depending on the view or report type, as well as the time period being analysed.
38. Data View is capable of dynamically aggregating data down to a granularity of less than one day.
39. Data Channel aggregates data for larger granularity values.
40. Voting time period - The length of time over which the frequency with which resources are sampled for data is established is referred to as the voting time or polling period.
41 . The process of making predictions about what will occur in the future by taking into account what has happened in the past and what is happening in the present is referred to as forecasting.
42. Forecasting is a decision-making tool that examines previous data and patterns with the goal of assisting organisations in dealing with the impact ofthe unpredictability of the future.
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43. Forecasting is a tool for planning that gives companies the ability to map out their next steps and set budgets that will ideally cover any unpredictability the future may bring.
44. The following are Characteristics Of Forecast:
a) Involves future events
b) Covers recent and historical occurrences
c) Uses various techniques of forecasting
45. Data Visualisation is the process of representing data through the use of popular graphics, such as charts, plots, infographics, and even animations.
46. The study of the complete set of DNA (including all of its genes) in a person or other organism. Almost every cell in a person's body contains a complete copy of the genome. The genome contains all the information needed for a person to develop and grow.
47. Data cleaning is the process of fixing or removing incorrect, corrupted, incorrectly formatted, duplicate, or incomplete data within a dataset.
48. Hadoop is an open-source system that stores and analyses large datasets on clusters of commodity hardware in an efficient manner. This framework can manage massive amounts of structured and unstructured data, and it is free to use. Because of these features, it is an invaluable component for any big data activity.
49. NoSQL databases are non-relational data management systems that do not require a fixed scheme. Because of this, they are an excellent choice for large amounts of raw data that are not structured. These databases, whose name comes from the phrase “not simply SQL,” are able to deal with a wide variety of data models.
50. MapReduce, is a key component Hadoop’s framework, and this framework serves two different purposes. The first step is called mapping, and it distributes data to different nodes within the cluster using various filters. The second step is called “reducing,” and it involves organising and condensing the results obtained from each node in order to respond to a query.
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51. “Yet Another Resource Negotiator” is what “YARN” stands for in full. It is yet another component of the Hadoop system of the second generation. The job scheduling and resource management in the cluster can be improved with the assistance of the cluster management technology.
52 Spark is an open-source cluster computing framework that provides an interface for programming complete clusters by utilising implicit data parallelism and fault tolerance. Spark is capable of handling both batch and stream processing, which enables it to do computations quickly.
53. Tableau is a platform for end-to-end data analytics that enables you to prepare, analyse, collaborate, and share your insights derived from large amounts of data. Tableau is a leader in the field of self service visual analysis, which enables individuals to pose novel inquiries using managed big data and to simply communicate their findings throughout an organisation.
54. Packet Sniffing method, which can also be referred to as tag less data capture or passive network capture, involves inserting a tap between mobile users and the web server in order to record the entirety of the client server conversation.
55. Link redirection is an important tool that can be used to track the activity of mobile visitors. It is the only method that can reliably record clicks from marketing operations such as advertising, search, and other marketing endeavours. Additionally, it logs visitors’ clicks on links that lead them away from a website. This solution helps address the problem of mobile devices not providing HTTP referrer information.
56. HTTP Header Analysis provides with information on a variety of fundamental aspects of the mobile phone as well as the browser. In conjunction with a device database, such as WURFL, it is possible to use this tool.
57. IP Address Analysis - On the basis of the Internet Protocol (IP) addresses of the operators’ internet gateway devices, an operator database is utilised to determine the operators’ countries of origin. IP addresses on their own are not sufficient to identify all mobile network providers or nations since some mobile network operators share their mobile networks with virtual network operators (MVNO).
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58. Business analytics (BA) refers to the mix of skills, tools, and practices that are used to analyse the data and performance of an organisation in order to acquire insights and make decisions that are data-driven in the future using statistical analysis.
59. Data mining is the act of searching through enormous data sets in order to find patterns and relationships that, when analysed, can assist in the resolution of issues that arise in commercial enterprises.
60. Text mining, also known as text data mining, is the act of translating unstructured text into a structured format in order to find relevant patterns and fresh insights. This technique can also be called text data mining.
61. The process of gathering raw data and expressing it in a summary form for the purposes of statistical analysis is referred to as data aggregation.
62. The term “forecasting” refers to the process of attempting to make accurate predictions about what will occur in the future by analysing both the recent past and the ongoing present.
63. The depiction of data through the use of popular graphics, such as charts, plots, infographics, and even animations, is referred to as data visualisation. These visually appealing representations of information simplify the communication of complicated data relationships and insights that are generated by data in a way that is easy to grasp.
64. Big data analytics is the use of advanced analytic techniques to very large, diverse data collections. These data sets may be organised, semi-structured, or unstructured; they may come from a variety of sources; and their quantities may range anywhere from terabytes to zettabytes.
65. Mobile web analytics, also known as responsive web analytics, is an extension of regular web analytics that focuses on the behaviour of mobile website users. Mobile web analytics is a term that is used in the business world to describe the process of collecting data from customers who browse a website using their mobile phones.
66. Data linking is the process of collating information from different sources in order to create a more valuable and helpful data set. The linking of information about the same person or entity from disparate sources allows, among other things, the construction of a chronological sequence of events.
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67. A Piot Table is a powerful data summarization tool that can automatically sort, count, and sum up data stored in tables and display the summarized data.
68. A Macro is an automated input sequence that imitates keystrokes or mouse actions. A macro is typically used to replace a repetitive series of keyboard and mouse actions and used often in spreadsheets and word processing applications like MS Excel and MS Word.
69. Data Validation means checking the accuracy and quality of source data before using, importing or otherwise processing data. Different types of validation can be performed depending on destination constraints or objectives. Data validation is a form of data cleansing.
70. Big Data is data that contains greater variety, arriving in increasing volumes and with more velocity. This is also known as the three Vs. Put simply, big data is larger, more complex data sets, especially from new data sources.
71. Web and Mobile Analytics - Mobile analytics gathers data from mobile apps, while web analytics or product analytics pull information from users' experiences on both desktop and mobile websites.
72. A Platform is a group of technologies that are used as a base upon which other applications, processes or technologies are developed. Advertisements. In personal computing, a platform is the basic hardware (computer) and software (operating system) on which software applications can be run.
73. Tracking is used to expand or contract the amount of text on a page by expanding or reducing the amount of space between letters.
74. Kerning is the process of adding or subtracting space between specific pairs of characters.
75. Sessionization is the act of turning event-based data into sessions, the ordered list of a user's actions in completing a task. It is widely used in several domains, such as: Web analytics. This is the most common use, where a session is composed of a user's actions during one particular visit to the website.
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06.Green and Sustainable Financing
01. A sustainable financial system takes into account the environment, society, and government in addition to the economy.
02. Green finance does not take into account social or economic factors, but it does incorporate climate finance.
03. The term “climate finance” refers to a subset of “green” or “environmental” financing.
04. The most inclusive phrase is sustainable finance, which encompasses all forms of financing activity that aid in the achievement of sustainable development. Both “financing the green,” or investing in environmentally friendly solutions, and “greening the finance,” or reorienting the financial system, are necessary components of the investment that must be made in order to address the sustainability concerns that exist in the modem world.
05. Green bonds are a type of financial instrument that are issued by a company in order to raise money from investors. The funds that are raised via the sale of green bonds are then utilised for the purpose of financing ‘green’ projects. Green bonds are an efficient means of raising financing for renewable energy projects while simultaneously achieving the environmental goals of investors and the climate goals of the Government of India.
06. Green bonds are a global phenomenon that was first introduced in the United States.
07. In 2017, the Securities and Exchange Board of India (SEBI) issued guidelines on green bonds.
08. Green bonds are a type of unsecured debt instrument that is used to finance green projects that provide benefits to the environment.
09. The commitment of an issuer of a green bond to use the proceeds from the sale of the bond to finance or re-finance “green” projects, assets, or business activities distinguishes a green bond from a standard bond. Green bonds can be issued up front by either public or private actors in order to raise capital for projects or for the purposes of re-financing. This results in increased lending and frees up capital for other uses.
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10. Bonds that are issued outside of India but are denominated in Indian Rupees rather than the local currency have been issued by Indian corporations. These bonds are known as Green Masala Bonds.
11. A brown economy is one in which economic growth is largely dependent on environmentally destructive forms of activity, especially fossil fuels like coal, oil, and gas.
12. Greenwashing is a communication and marketing strategy adopted by companies or other organizations. It consists in putting forward ecological arguments in order to forge an ecologically responsible image among the public.
13. Environmental Financing is a field within finance that employs market-based environmental policy instruments to improve the ecological impact of investment strategies.
14. Sustainable Finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
15. ESG Criteria are a set of standards for a company's operations that socially conscious investors use to screen potential investments.
16. Information Asymmetry deals with the study of decisions in transactions where one party has more or better information than the other.
17. Climate Risk is the potential for climate change to create adverse consequences for human or ecological systems. This includes impacts on lives, livelihoods, health and wellbeing, economic, social and cultural assets and investments, infrastructure, services provision, ecosystems and species.
18. ISO 14001 is an international standard that specifies auditing best practises for organisations’ environmental management systems and policies.
19. “Greenwash” is a company’s attempt to improve its environmental image as a means of promoting itself and its products and gaining customers, without necessarily having any genuine substance to back up its claims. “Greenwashing” is thus a necessary economic activity that should be supported ifconducted positively and responsibly.
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20. Coal is not a “renewable” source of energy.
21. Yes Bank was the first Indian Bank to issue Green Infrastructure Bonds in India.
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07. Special Purpose Acquisition Companies
01. A company that does not carry any commercial operations and is incorporated purely for the purpose of raising capital through an Initial Public Offering (IPO) or is incorporated for the goal of acquiring or merging with an existing company, is known as a special purpose acquisition company (SPAC).
02. A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person.
03. SPACs are organisations that are formed by investors or sponsors who have experience in a specific industry or business sector with the purpose of pursuing business opportunities in that field. In most cases, the investors have at least one acquisition target in mind at the time of the company’s establishment; however, this information is not disclosed at the time of the IPO in order to streamline the disclosure process.
04. Special purpose acquisition companies (SPACs) have three different stakeholder groups - Sponsors, Investors, and Targets.
05. Sponsors - The process of creating a SPAC is started by sponsors. Their contributions to SPAC, which take the form of non-refundable fees to bankers, attorneys, and accountants, are intended to cover the costs of running the organisation. In the event that the Sponsor is unable to form a combination within a period of two years, the SPAC will have to be dissolved, and the investors will be entitled to a full refund of their money.
06. The SPAC Charter is the document that establishes the public shares as well as the founder shares and includes an anti-dilution modification to the conversion ratio for the founder shares. Additionally, it places limitations on the use of the money in the trust account, limiting its applications to only the repurchase of public shares and the determination of a minimum size requirement for the business that would be acquired in a De-SPAC transaction.
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07. Securities Purchase Agreement - The Sponsor and the SPAC enter into a Securities purchase Agreement, which provides for the issue of founder shares to the Sponsor of the SPAC. The number of founder shares is typically set at 25% of the total amount of publicly traded shares that are initially registered on the registration statement. However, the number of founder shares may be decreased or increased through a stock split, dividend, or forfeiture in order to size the founder shares to the initially agreed upon percentage of 25%.
08. A de-SPAC transaction is one in which private companies go public by merging with special-purpose acquisition companies (SPACs). SPACs are basically shell companies with no tangible assets other than the cash they have received from investors.
09. A special purpose acquisition company, often known as a SPAC, is a company that is created with the intention of acquiring an existing business after first raising capital through an initial public offering.
10. SPACs bring together experienced management teams, often consisting of industry veterans, private equity sponsors, or other financing experts who can leverage their expertise to raise capital to acquire, then operate, a new public company within 24 months or less, a SPAC1 will find an attractive company to acquire, and once that transaction is completed, a new publicly traded company is formed. As a result of this, the structure of this kind of shell firm is sometimes referred to as a “blank-cheque company” in the popular media. After the SPAC has completed its initial public offering (IPO) and raised the necessary cash, those assets are placed in a trust where they remain until either a certain amount of time has passed or the acquisition that was intended has been completed. If the proposed acquisition does not go through or the legal procedures are not yet completed, the SPAC is obligated to refund the monies to the investors, but only after subtracting the costs associated with the bank and broker transactions.
11. SPACs give investors a one-of-a-kind opportunity to engage in a management team that has a proven track record and to take part in a private equity-style venture in a more liquid manner. This presents a significant competitive advantage for investors.
12. Despite the fact that investing in a SPAC carries an inherent risk, affluent individuals and organisations who have prior experience can successfully manage this risk.
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13. Due to the fact that taking a company public through the traditional IPO route is typically a time-consuming and challenging endeavour, the emergence of SPACs as a viable alternative has sped up the pace at which companies can successfully raise capital.
14. SPACs make it possible for these businesses to gain access to public capital. SPACs are not going away anytime soon, and there is a good chance that they will provide major benefits to their investors. It is inevitable that some SPACs will fail, often in spectacular fashion, and that some of the players would behave unethically; this is something that may happen with any other technique of capital formation as well.
