Notes, summaries, assignments, exams, and problems for Economy

Income from Other Sources: Key Questions and Answers

Q1. What is the name of the fifth head of income?

Ans: Income from other sources.

Q2. What are the essential conditions for chargeability of income under the head 'Income from Other Sources'?

Ans: The following conditions must be satisfied:

• (i) There must be an income that is not exempted from tax.
• (ii) The income must not be chargeable under any of the first four heads (i.e., other than the head 'Income from Other Sources').

Q3. Write two examples of income that are chargeable under the head 'Income from Other Sources'.

Ans:

• (i) Winning from lotteries
• (ii) Winning from crossword puzzles

Q4. Under which head is the salary of MP/MLA charged?

Ans: Income from other sources.

Q5. Define the term 'security'

Introduction to Financial Derivatives

Definition of a Derivative

Financial instruments allow contracting parties to buy or sell an underlying asset at a future date at a price agreed upon at the time of contracting. The underlying asset may be an equity asset, bonds, currencies, interest rates, commodities, and more. The effective purchase is only made on the maturity date and settlement, in some cases by physical delivery and in others by cash settlement for differences between the price originally agreed and that prevailing on the date of settlement or maturity of the transaction.

With these types of derivative instruments, it is possible to act in a leveraged manner since their purchase or sale does not require the availability of funds or... Continue reading "Financial Derivatives: Mechanics of Futures, Swaps, and Options" »

Revenue: Unit selling price A* Quantity A +Unit selling price B* Quantity B

Purchases: - ((Quantity A* Unit cost of sale A + Quantity B* Unit cost of sale B)+ Chang invent)

Change of inventory: Inventory Year 1 - Inventory Year 0

Consume cost of good sold: Purchases + Change of inventory.

Gross Profit: Revenue + Consume cost of goods sold.

Overheads: - overheads (table)

Ebitda: Gross profit + overheads

Am & depreciation: - gross asset + COSTOF DEBT of debt (table)

Ebit-BAII: Ebitda + Am & depreciation.

Financial result: - Total debt (table) * COSTOF DEBT of debt (table)

EBT- BAI: Ebit + Financial result

Taxes: - EBT * TAX rate (table)

Net earning: EBT + Taxes

Gross asset Y1 : Gross asset year 0 + CAPEX

Accumulated amortitation Y1: Accumulated amortitation... Continue reading "Core Financial Modeling Formulas and Metrics" »

What are the Three Fundamental Reasons for the Welfare State's Existence?

The three fundamental reasons for the existence of the welfare state are:

• To assist the economically disadvantaged.
• To address market failures, such as inefficiencies in private insurance and pension systems.
• To support economic growth.

What is the Difference Between Risk and Uncertainty, and How Does the Welfare State Address Both?

Risk refers to situations where the probabilities of possible outcomes are known, while uncertainty is when these probabilities are unknown. The welfare state copes with both scenarios by collectively spreading the risk across a large number of people and adjusting contributions as necessary. This differentiates it from private insurance, which... Continue reading "Welfare State Evolution: Foundations, Challenges, and Policy Solutions" »

Core Business Definitions and Stakeholders

Key Business Products

• Goods: Physical products.
• Services: Non-physical products.
• Consumer Goods: Goods and services sold directly to ordinary people (consumers).
• Producer Goods: Goods and services sold to other businesses.

Types of Enterprise Ownership

Ownership determines who controls and benefits from the enterprise:

• Private Enterprise: Owned by individuals.
• Social Enterprise: A resource focused on objectives other than profit maximization.
• Public Enterprise: Owned and controlled by the government.

Understanding Stakeholders

Stakeholders are individuals or groups with an interest in the business's operations and success. Key stakeholders include:

• Local community
• Owners
• Suppliers
• Customers
• Government
• Employees
• Managers
• Shareholders

Roles

Model A: Strategic Management Concepts

1. According... consolidation? c)
2. What... have? b)
3. How... the company? b) ...successfully
4. What... market? d) It's the intersection
5. What... defined? c) The sum
6. The star... matrix... b) Have large
7. What... activity? c) The set of products
8. What... matrix? b) Market appeal
9. What... consist of? d) Restructuring
10. What... economies? a) Related diversification
11. What... company? d) Vertical integration
12. What... bankruptcy? a) Unrelated diversification
13. In which... business? a) Unrelated

Model A: Implementation and Testing

14. How... stages? d) Set of objectives
15. A new... view? b) It is any
16. Challenging... consumption? b) Flank
17. When... differentiation? b) When a company
18. For the... define? c) Integrity is the extent
19. When... challenger? a) ...weakest
20. When.

Capital Structure Review and Theories

Understanding the implications of various capital structure theories is crucial for corporate finance decisions.

Modigliani-Miller (M&M) Propositions

• Case I: Value of Levered Firm (VL) = Value of Unlevered Firm (VU)
  • Assumes a perfect world: no taxes, no bankruptcy costs, perfect information symmetry, competition, and no transaction costs.
  • Capital structure is irrelevant to firm value.
  • The cost of capital remains constant.
    • Adding cheaper debt increases equity risk (higher required return on equity).
    • This increase in equity cost perfectly offsets the benefit of cheaper debt, keeping the Weighted Average Cost of Capital (WACC) the same.
• Case II: VL = VU + Present Value of Tax Shield (DT)
  • Includes corporate tax,

Chapter 3: Business Organizations

There are five main forms of business organizations in the private sector:

1. Sole Traders
2. Partnerships
3. Private Limited Companies (PLCs)
4. Public Limited Companies (Ltd.)
5. Co-operatives

Key Business Terms

Limited Liability: This term refers to the owners of a company (shareholders). They are not held responsible for the debts of the company they own. Their liability is limited to the investment they made in buying the shares.

Partnership Agreement: A written and legal agreement between business partners. While not essential, it is always recommended.

Sole Traders: The most common form of business organization. It is a business owned and operated by one person.

Partnerships: A group or association between 2 and 20 people who... Continue reading "Business Organizations: Structures & Key Concepts" »

Municipal Bond Yield Calculations

Equivalent Taxable Yield (ETY)

A municipal bond carries a coupon rate of 6.00% and is trading at par.

Required Calculation 1: ETY for a 38% Tax Bracket

What would be the equivalent taxable yield of this bond to a taxpayer in a 38% combined tax bracket?

The formula for Equivalent Taxable Yield ($r$) is:

$$r = r_m / (1 - t)$$

• $r$: Equivalent Taxable Yield
• $r_m$: Municipal Bond Yield (6.00% or 0.06)
• $t$: Tax Rate (38% or 0.38)

Calculation:

$$0.06 / (1 - 0.38) = 0.096774 \rightarrow \mathbf{9.68\%}$$

Required Calculation 2: Municipal Yield Preference

An investor is in a 40% combined federal plus state tax bracket. If corporate bonds offer 7.75% yields, what yield must municipals offer for the investor to prefer them to corporate... Continue reading "Financial Calculations: Yields, Index Returns, and Security Pricing" »

Hedging with S&P 500 Index Futures

SIF hedging: NF = V_F(antiguo) = F_o x Z. NF (Number of contracts) = V_p (portfolio value) / (V_F x B_p) (Beta). With this hedge, risk is removed. If the index goes up, the profit in the portfolio will be offset by losses in SIFs contracts and vice versa.

Example: S&P 500 falls 5%:

• In the portfolio: R_p = B_p x (-5%) = -10% of a portfolio of $10M, resulting in $9M (Final Value).
• In the SIFS contracts: S_i = 980 (S&P 500 value given) x 0.95 (100% - 5%) = 931. F_i = 931 x (1 + 0.04 x 5/12 (next month timeframe)) = 946.52. V_F = NF x (F_i - F_o) x Z (250).
• Gain on futures: V_F(New) / Equity portfolio value.
• Outcome stock portfolio: 2 x (-5%) = -10%.
• Final Value portfolio: $10M - $1M + V_F(New).

Margin Payments

Margin payments... Continue reading "Hedging and Speculation with Futures and Options" »