CERTIFIED MANAGEMENT ACCOUNTANT

(CMA), US
PART 2 – FINANCIAL DECISION MAKING
STUDY NOTES
EFFECTIVE TILL 31 DECEMBER 2019

MUHAMMAD ZAIN
CPA, CMA, CIA
FOUNDER OF ZAIN ACADEMY
Clifton Block 5, Karachi, Pakistan
Call (US & Canada): + 1 646 979 0865
Call (Pakistan & International): + 92 311 222 4261
Whatsapp (Messaging & Call): +92 311 222 4261
Hangouts: [email protected]
Email: [email protected]
Web: www.zainacademy.us
About the Mentor

Muhammad Zain has passed Uniform Certified Public Accountant (CPA) exams
from American Institute of Certified Public Accountants (AICPA), US in February
2018, Certified Management Accountant (CMA) exams from Institute of
Management Accountants (IMA), US and Certified Internal Auditor (CIA) exams
from Institute of Internal Auditors (IIA), US in March 2014. He has completed his
Masters of Business Administration (MBA) in March 2010 from University of
Karachi, Pakistan. He earned his Bachelors of Commerce (BCOM) from the same
University in November 2007.
He has working experience of more than 10 years which includes five years of
Public Accounting experience of working in EY Ford Rhodes, Pakistan – a member
firm of Ernst & Young Global Limited (big4) and more than 5 years of working
experience in Industry in managerial capacity.
He founded Zain Academy in 27 February2017 with the mission “Knowledge for
ALL” and objective to “disseminate education for all candidates who wish to change
the landscape of our working environment, believe in continuous education and
strive for the best.”
Readers are welcomed to contact him for online interactive sessions for any part
of CPA, CMA or CIA.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 3 of 66

13 September 2018

Dear CMAs,

It is my great honor to present you the 2ND edition of Certified Management

Accountant (CMA) – Part 2 – Financial Decision Making Study Notes.
These Study Notes are not copyrighted and are universally accessible to all. You
are permitted to use these notes and distribute them to the other candidates as
well.
I have tried to keep the materials simple, clear and concise. I welcome feedback
from the potential readers. These materials are relevant till 31 December 2019.
However, please do check the Facebook page
https://www.facebook.com/zainacademy for updates. Extreme care is required
when rendering professional advice to clients.
Readers are encouraged to provide a review / feedback on the materials on
https://www.facebook.com/zainacademy/reviews/. This review will help
prospective candidates to benefit from improvements in the materials.
I dedicate this work to my parents who have always believed in my abilities and
guided me through the toughest of times.
May the ALLAH, Creator of the Heavens and Earths bless you ALL in this Life
and in particular the Life Hereafter as well.

With Love and Care,

Muhammad Zain
CPA, CMA, CIA

From the Desk of Muhammad Zain – Founder of Zain Academy Page 4 of 66

 INDEX

SECTION A – Financial Statement Analysis ............................................................. 6

SECTION B – Corporate Finance ................................................................................ 15

SECTION C – Decision Analysis ................................................................................ 33

SECTION D – Risk Management ............................................................................... 46

SECTION E – Investment Decisions .......................................................................... 51

SECTION F – Professional Ethics ............................................................................... 62

From the Desk of Muhammad Zain – Founder of Zain Academy Page 5 of 66

SECTION A – Financial Statement Analysis (Weightage 25%)

S.No Questions Answers

1. What are the five  Liquidity ratios, which measure the sufficiency of the firm’s
classifications of ratios? cash resources to meet its short-term cash obligations.
 Leverage, capital structure, solvency and earnings coverage
ratios, which evaluate the firm’s ability to satisfy its debt and
obligations for other fixed financing charges such as operating
leases by looking at the mix of its financing sources and its
historical earnings.
 Activity ratios, which provide information on a firm's ability
to manage efficiently its current assets (accounts receivable
and inventory) and current liabilities (accounts payable).
 Profitability analysis, which measures the firm’s profit in
relation to its total revenue or the amount of net income from
each dollar of sales and its return on invested assets.
 Market ratios and earnings per share analysis,
or shareholder ratios, which describe the firm’s financial
condition in terms of amounts per share of stock.

2. How is operating income Sales or service revenues

calculated? − Cost of goods sold (COGS)
= Gross profit
− Selling, general, and administrative expenses
= Operating income
3. How is EBIT calculated? Operating income
+ Interest and dividend income
+/− Non-operating gains/(losses)
+/− G/L from operations of discontinued Component X including
G/L on disposal of $XXXX (before tax)
= Earnings Before Interest and Taxes (EBIT)
4. What is EBITDA? EBITDA stands for earnings before interest, taxes, depreciation and
amortization. EBIT (earnings before interest and taxes) includes
deductions for depreciation and amortization expensed. Therefore,
EBITDA is EBIT plus depreciation and amortization expense, to “add
back” the depreciation and amortization. EBITDA is used to analyze a
company's earnings before interest and taxes as well as before the
non-cash charges of depreciation and amortization.
5. How is EBT calculated? Earnings Before Interest and Taxes (EBIT)
− Interest expense
= Earnings Before Taxes (EBT)
6. What is a vertical common- A simple vertical common-size financial statement covers one year’s
size financial statement? operating results and expresses each component as a percentage of a
total.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 6 of 66

 For example, fixed assets will not be stated as a dollar amount but
rather will be stated as a percentage of total assets. Each expense
item will be stated as a percentage of total revenue.
7. What is horizontal Horizontal trend analysis is used to evaluate trends for a single
trend series analysis? business over a period of several years.
The first year is the base year, and amounts for subsequent years are
presented not as dollar amounts but as percentages of the base year
amount, with the base year assigned a value of 100%, or 100.
8. How is working capital Current Assets
calculated? − Current Liabilities
= Working Capital

9. How is the current ratio Current Assets

calculated? Current Liabilities

10. How is the quick ratio Cash + Net Receivables + Marketable Securities
calculated? Current Liabilities

11. How is the cash ratio Cash & Cash Equivalents + Marketable Securities
calculated? Current Liabilities

12. How is the cash flow ratio Operating Cash Flow

calculated? Period-End Current Liabilities

13. How is the net working Net Working Capital

capital ratio calculated? Total Assets

14. What is financial leverage? The use of debt to increase earnings.

15. How is the financial leverage Total Assets

ratio calculated? Total Equity

16. How is the degree of % [of future] Change in Net Income

financial leverage % [of future] Change in EBIT
calculated? (Earnings Before Interest and Taxes)

17. What is operating leverage? Operating leverage measures the use of fixed operating costs to
generate greater operating profit.
How is the degree of % [of future] Change in EBIT
18. operating leverage % [of future] Change in Sales
calculated?
19. What does degree of Degree of total leverage expresses the degree to which a company
total leverage measure? uses fixed costs in its operations as well as the degree to which the
company uses fixed rate financing in its capital structure.
20. How is the degree of total % [of future] Change in Net Income
leverage calculated? % [of future] Change in Sales

From the Desk of Muhammad Zain – Founder of Zain Academy Page 7 of 66

 21. How is the debt to equity Total Liability
ratio calculated? Total Equity

22. How is the long-term debt to Total Debt − Current Liabilities

equity ratio calculated? Total Equity

23. How is the debt to total Total Liabilities

assets ratio calculated? Total Assets

24. How is the times interest Earnings before Interest and Taxes (EBIT)
earned ratio calculated? Interest Expense

25. How is the fixed charge Earnings Before Fixed Charges and Taxes
coverage ratio calculated? Fixed Charges

26. How is the cash flow to fixed Adjusted Operating Cash Flow
charges ratio calculated? Fixed Charges

27. How is the accounts Net Annual Credit Sales

receivable turnover ratio Average Gross Accounts Receivable
calculated?
28. How is the number of days 365
receivables held ratio Receivables Turnover
calculated?
29. How is the inventory Annual Cost of Goods Sold
turnover ratio calculated? Average Inventory

30. How is the days sales in 365

inventory ratio calculated? Inventory Turnover

31. How is the accounts payable Annual Credit Purchases

turnover ratio calculated? Average Accounts Payable

32. How is the days purchases in 365

payables ratio calculated? Accounts Payable Turnover

33. How is the operating cycle Days Sales in Inventory

calculated? + Days Sales in Receivables
= Operating Cycle

34. How is the cash cycle Days Sales in Inventory

calculated? + Days Sales in Receivables
− Days Purchases in Payables
= Cash Cycle

35. How is the total asset Sales

turnover ratio calculated? Average Total Assets

From the Desk of Muhammad Zain – Founder of Zain Academy Page 8 of 66

 36. How is the fixed asset Sales
turnover ratio calculated? Average Net Property, Plant, and Equipment

37. How is profit margin Net Income after Interest and Taxes
calculated? Net Sales

38. How is book value per share Total Stockholders’ Equity – Preferred Equity
calculated? Number of Common Shares Outstanding

39. How is the market-to-book Market Price per Share

ratio calculated? Book Value per Share

40. What are basic earnings per • Basic earnings per share (BEPS) is the earnings per share for
share and diluted earnings all common shares that were actually outstanding during the
per share? period.
• Diluted earnings per share (DEPS) is the earnings per share
that would have resulted if all potentially issuable and dilutive
common shares had been issued on the first day of the period
(or, if issued during the period, on the date of issue).
41. How is BEPS calculated? Income Available to Common Stockholders (IAC)
Weighted-Average Number of Common Shares Outstanding
(WANCSO)

42. How is income available to Net Income

common shareholders − Noncumulative preferred dividends DECLARED (whether or
calculated? not paid) and/or
− Cumulative preferred dividends EARNED (whether or not
declared)
= Income Available to Common Stockholders (IAC)

43. How are shares issued They are considered outstanding only for the time after they are
during the year treated in issued.
calculating WANCSO?
44. How are shares reacquired They are considered outstanding only for the time period before they
during the year treated in are reacquired.
calculating WANCSO?
45. How are shares issued as They are considered to be outstanding for the entire year in which
part of a stock split during they are issued.
the year treated Additionally, they are considered to have been outstanding from
in calculating WANCSO? January 1 of the first year presented. This will require a recalculation
of EPS for those previous periods.
46. How are shares issued as They are considered to be outstanding for the entire year in which
part of a stock dividend they are issued.
during the year treated in Additionally, they are considered to have been outstanding from
calculating WANCSO? January 1 of the first year presented. This will require a recalculation
of EPS for those previous periods.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 9 of 66

 What are the three steps 1) Assume that all the options or warrants were exercised on
to determine the impact of January 1.
options and warrants on 2) Take the cash from the exercise and assume that the
DEPS? company purchases back from the market as many shares as
possible at the average price for the year.
3) Net the shares issued (#1) and shares repurchased (#2) to
determine net shares issued.
Note: If the exercise price is higher than the average market price the
option or warrant is antidilutive and not included in DEPS.
47. How is the EPS Effect Interest on the Bonds × (1 – Tax Rate)
calculated for convertible # of Shares the Bonds are Converted Into
bonds?

48. How is the EPS Effect Dividends Earned (if cumulative) and/or
calculated for convertible Declared (if noncumulative)
preferred shares? # of Shares the Preferred Shares are Converted Into

49. How is the price/earnings Market Price per Common Share

ratio calculated? Basic Earnings per Share (annual)

50. How is the price/EBITDA Market Price per Common Share

ratio calculated? EBITDA per Share

51. How is earnings yield Basic Earnings Per Share (annual)

calculated? Current Market Price Per Common Share

52. How is the dividend yield Annual Dividends Per Common Share
calculated? Current Market Price Per Share

53. How is the dividend payout Annual Dividends Per Common Share
ratio calculated? Basic Earnings Per Share

54. How is shareholder return (Ending Stock Price – Beginning Stock Price)
calculated? + Annual Dividends Per Share
Beginning Stock Price

55. How is gross profit margin Gross Profit

calculated? Net Sales

56. How is operating profit Operating Income

margin percentage Net Sales
calculated?
57. How is net profit margin Net Income
percentage calculated? Net Sales

From the Desk of Muhammad Zain – Founder of Zain Academy Page 10 of 66

 58. How is EBITDA margin EBITDA
calculated? Net Sales

59. How is return on assets Net Income

calculated? Average Total Assets

60. How is return on equity Net Income

calculated? Average Total Equity

61. How is return on common Net Income – Preferred Dividends

equity calculated? Average Book Value of Common Equity

62. How is return on assets Net Income

calculated? Average Total Assets

63. What are four factors that 1) Accounting estimates

can impact the calculation of 2) Accounting methods
income? 3) Incentives for disclosure
4) Diversity among users

64. How is the sustainable Return on Common Equity × (1 – Dividend Payout Ratio)
growth rate calculated?
65. How are transactions 1) On the date the transaction is entered into, it is recorded
denominated in foreign using the exchange rate on that date.
currency accounted for? 2) At the end of each reporting period the value of the
receivable or payable is adjusted to the current value using
the exchange rate at that date.
3) When the transaction is settled, it is adjusted to the current
value using the exchange rate on that date.
66. Where is the gain or loss on It is reported on the income statement in the period it occurs as a non-
a foreign currency operating gain or loss.
denominated transaction
reported?
67. What are the three 1) The currency of record is the currency the foreign entity uses
currencies potentially to keep its books.
involved in a 2) The functional currency is the currency of the primary
foreign subsidiary? economic environment in which the foreign entity operates.
It is the currency in which the entity generates and expends
cash.
3) The reporting currency is the currency used in the financial
statements of the foreign entity.
68. When is a remeasurement Remeasurement must be done prior to consolidation when the
required? foreign entity’s currency of record is different from its functional
currency.
69. When is a translation done? A translation is done when the financial statements of the subsidiary
are in a functional currency that is not the US Dollar.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 11 of 66

 70. Where do the gains or losses Gains or losses from remeasurement are recognized on the income
from remeasurement and statement.
translation get reported? Gains or losses from translation are reported in accumulated other
comprehensive income.
71. What are two methods to 1) Constant dollar accounting (also called general price-level)
adjust financial statements 2) Current cost accounting
to remove the effect of
inflation?
72. What is off-balance sheet Any form of funding that avoids placing owners' equity, liabilities, or
financing? assets on a firm's balance sheet.
73. What are four common ways 1) Operating leases to finance acquisition of assets
of 2) Special-purpose entities, or SPEs, now called variable interest
off-balance sheet financing? entities
3) Sale of receivables, also called factoring
4) Joint ventures, in which two or more “parent” companies
agree to share capital, technology, human resources, risks,
and rewards in the formation of a new entity to be managed
under their shared control.
74. What are some of the  A change in an accounting principle, in other words, a change
common changes or from one Generally Accepted Accounting Principle to another
corrections to financial Generally Accepted Accounting Principle;
statements?  A change in reporting entity, such as changes in entities
included in combined financial statements or other
consolidation changes;
 A correction of an error, such as a mathematical mistake, a
mistake in applying a principle, and other errors; or
 A change in accounting estimate, such as a change in
estimated warranty costs.

75. What are the three methods 1) Retrospective application

of accounting for changes or 2) Restatement
corrections? 3) Prospective adjustment
76. What is a change in A change in accounting principle is a change from one accepted GAAP
accounting principle, and principle to another accepted GAAP principle.
how are such changes These changes are accounted for using retrospective application.
accounted for?
77. What is a change in A change in reporting entity can occur if consolidated financial
reporting entity and how is it statements are prepared in place of separate statements for each
accounted for? individual entity or if a change takes place in the subsidiaries or
companies that are included in the consolidation.
A change in reporting entity is accounted for retrospectively.
78. What is a correction of error Errors can result from mathematical mistakes, mistakes in applying an
and how is it accounted for? accounting principle, oversight, or misuse of facts.
Errors are corrected using restatement.
79. What are changes in Changes in estimates are a change in any estimate used in accounting.
accounting estimates and Examples include a change in the bad debt percentage, the useful life
how are they accounted for?

From the Desk of Muhammad Zain – Founder of Zain Academy Page 12 of 66

 of an asset, or a warranty expense estimate. These changes are
considered normal, recurring changes and adjustments.
Changes in estimates are treated prospectively.
80. What are accounting profit • Accounting profit is the profit that is calculated on the
and economic profit? income statement as revenues minus explicit costs. These are
the costs for which the company actually has to make a
payment to another party.
• Economic profit is the amount by which total revenue
exceeds the total economic costs of the company, which
include all of the firm’s explicit costs plus the relevant implicit
(opportunity) costs.
81. What are the three 1) The company’s business environment.
determinants 2) Its selection and application of accounting principles.
of earnings quality? 3) The character of its management.
82. What are the determinants 1) Earnings variability
of earnings persistence? 2) Earnings trend
3) Management incentives
4) Earnings management
83. How is a gain or loss from re- A re-measurement gain or loss is reported on the income statement
measurement reported? in the continuing operations section.
84. How is a gain or Translation gains and losses are recognized directly in stockholders’
loss from translation reporte equity as a component of accumulated other comprehensive income
d? on the translated balance sheet.
85. How is DEPS calculated? 1. Calculate BEPS.
2. Calculate the EPS Effect of warrants and options.
3. If warrants or options are dilutive, add their effect to
WANCSO and calculate Intermediate DEPS.
4. Calculate the EPS Effect of convertible bonds or convertible
preferred shares.
5. Rank the EPS Effects from convertible securities, from the
most dilutive to the least dilutive.
6. In the correct order from the most dilutive to the least
dilutive, add the effect of each convertible security to both
IAC and WANCSO to calculate Intermediate DEPS for each
security until reaching a security that is antidilutive.
7. Calculate the final Diluted EPS.

86. How is the effective tax The effective tax rate is calculated as income tax expense divided by
rate calculated? income from continuing operations before income taxes.
87. How is the sustainable Sustainable Growth Rate = Return on Common Equity Sustainable ×
growth rate calculated? (1 - Dividend Payout Ratio)
88. What are activity ratios? Activity ratios provide information about a firm's ability to efficiently
manage its resources—specifically its current assets, accounts
receivable and inventory—and its ability to effectively manage its
accounts payable.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 13 of 66

 89. What are comparative Comparative financial statements state each item of the financial
financial statements? statement not as a numerical amount, but rather as a percentage of
a relevant base amount.
90. What are  When the interest expense paid on the debt capital is less
the advantages of successful than the return earned from the investment of the debt
ly using financial leverage? capital (in other words, less than return on assets), the excess
return benefits the equity investors.
 Interest paid is tax-deductible, and its tax deductibility
effectively reduces interest as an expense.

91. What is solvency? Solvency is the ability of the company to pay its long-term obligations
as they come due. In contrast to liquidity, which is the ability to pay
short-term obligations, solvency is the ability to pay long-term
obligations.
92. What is the functional The functional currency is the currency of the primary economic
currency? environment in which the foreign entity operates. It is the currency in
which the entity generates cash and expends cash.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 14 of 66

SECTION B – Corporate Finance (Weightage 20%)

S.No Questions Answers

1. What is return? Return is income received by an investor on an investment.
2. What is the rate of return and Rate of return is the return expressed as a percentage of the
how is it calculated? principal amount invested.
Return Received for One Year’s Investment
Average Balance of Amount Invested

3. What is interest rate risk? The risk that the value of an investment will change over time
as a result of changes in the market rate of interest.
4. What is reinvestment rate risk? The risk that money invested in an instrument that matures
cannot be reinvested in another investment that will provide
the same, or a higher, level of return.
5. What is purchasing power risk? The risk that the purchasing power of a fixed amount of money
will decline as the result of an increase in the general price level
(inflation).
6. What is liquidity risk? The possibility that an investment cannot be sold (converted
into cash) for its market value.
Whenever an investment must be discounted significantly in
order to be sold, the investment has a high level of liquidity
risk.
7. What is foreign exchange risk? The risk that a transaction denominated in a foreign currency
will be impacted negatively by changes in the exchange rate.
8. What is credit risk? Credit risk, also known as default risk, is the risk that a
borrower of money will not be able to pay the interest and
repay the principal on a debt as it becomes due.
9. What is political risk? The risk that something will happen in a country that will cause
an investment’s value to change or even become worthless.
10. What are some examples of political  Expropriation
risks?  War
 Blockage of fund transfers
 Inconvertible currency
 Government bureaucracy, regulations, and taxes
 Corruption
 Attitude of consumers
 Foreign country's business culture

11. What is business risk? The variability of a firm’s earnings before interest and taxes
(EBIT).
12. What is total risk? Total risk is the risk of a single asset taken by itself and not
balanced against the risks of any other investments.
Total risk is defined as the variability of the asset’s relative
expected returns and is also sometimes called standalone risk.

From the Desk of Muhammad Zain – Founder of Zain Academy Page 15 of 66

 13. What is unsystematic risk? Risk that is specific to a particular company or to the industry
in which the company operates.
14. What is systematic risk? Systematic risk is any risk that could affect all investments.
15. What is market risk? Market risk is risk inherent in an investment that is traded on a
market simply because it is traded on a market and is subject
to market movements. Market risk is a systematic risk.
16. What is foreign exchange risk? Foreign exchange risk is the risk that a transaction
denominated in a foreign currency will be impacted negatively
by changes in the exchange rate.
17. What is industry risk? Industry risk is risk that is specific to a particular industry.
18. What is interest rate risk? Interest rate risk (sometimes called price risk) is the risk that
the value of the investment will change over time as a result of
changes in the market rate of interest.
19. What is inventory financing? In inventory financing the creditor buys and retains title to the
inventory. The debtor then acts as his trustee in the selling of
the inventory and also assumes the risk of loss of the inventory.
20. What is industry risk? Risk that is specific to a particular industry.
21. What is the capital asset pricing The capital asset pricing model (CAPM) uses the security or
model (CAPM)? portfolio’s risk and the market rate of return to calculate the
investors’ required return. The theory behind the CAPM is
that investors will price investments so that the expected
return on a security or a portfolio will be equal to the risk-free
rate plus a risk premium proportional to the risk, or “beta,” for
that investment.
22. What is beta in the CAPM formula? A measurement of the systematic risk of a security or a
portfolio.
23. What is the capital asset pricing R = RF + β(RM − RF)
model formula? R = Investors’ required rate of return
RF = Risk-free rate of return
β = Beta coefficient
RM = Market’s required rate of return

24. What is a portfolio? A collection of assets that are managed as a group.

25. What is the idea behind Diversification combines securities in ways that reduce risk.
diversification? Different types of investments often change in market value in
opposite directions, so when one asset’s market price
decreases, another asset’s market price might increase to
offset the loss.
26. What is asset allocation? The process of selecting assets for a portfolio to achieve the
best risk/return tradeoff possible.
27. What does the coefficient of The coefficient of correlation measures the relationship
correlation measure? between two variables.
It expresses how closely connected, or correlated, the two
variables are and the extent to which a change in one variable
has historically resulted in a change in the other.
28. What are the sources 1) Long-term debt
of external funds? 2) Preferred stock

From the Desk of Muhammad Zain – Founder of Zain Academy Page 16 of 66

 3) Common stock
29. How is the yield of a Yield of a Treasury security of the same term
debt security calculated? + Default premium
+ Liquidity premium
+/− Premium or Discount for tax status
+/− Premium or Discount for special provisions
= Yield of debt security

30. How is a yield curve prepared? By graphing the rates and terms for each security.
31. What are the shapes 1) Upsloping (normal)
of the yield curve? 2) Downsloping
3) Flat
4) Humped
32. What are the four theories 1) Pure (Unbiased) Expectations Theory
used to explain the 2) Liquidity Premium (Preference) Theory
slope of the yield curve? 3) Segmented Markets Theory
4) Preferred Habitat (Composite) Theory
33. Under the pure expectations theory, The yield curve is determined exclusively by expectations in the
what determines the yield curve? market of future short-term interest rates.
34. Under the liquidity premium theory, The yield curve is determined by:
what determines the yield curve? 1) The market’s expectations for future interest rates.
2) A liquidity premium for holding a less-liquid security.
The liquidity premium increases as the term gets
longer.
35. Under the segmented markets Because the cash needs of different groups and investors vary,
theory, what determines each group chooses securities that meet their forecasted cash
the yield curve? needs and not because of expected future interest rates.
Interest rates for each maturity term are determined by the
interplay of supply and demand for that term.
36. What is the Preferred habitat theory is a hybrid theory, or a compromise,
preferred habitat theory? that agrees with parts of the segmented markets theory and
parts of the pure expectations theory.
37. What are uses of the yield curve? 1) Forecasting interest rates
2) Forecasting recessions
3) Making investment decisions
4) Making financing decisions
38. What are the advantages of issuing  The bond issuer has no loss of control or ownership.
bonds?  The total cost of the bonds is limited and known
because the interest rate that is used to calculate the
cash paid for interest is constant throughout the life of
the bond.
 Bonds have an advantage over stock, because the
interest that is paid on the bonds is tax-deductible as
an expense of the business.
 If the bonds are callable, or otherwise can be retired
early, the company has the flexibility to eliminate the
interest payment if there is no longer a need for the

From the Desk of Muhammad Zain – Founder of Zain Academy Page 17 of 66

 Thank You for previewing this eBook
You can read the full version of this eBook in different formats:

 HTML (Free /Available to everyone)

 PDF / TXT (Available to V.I.P. members. Free Standard members can

access up to 5 PDF/TXT eBooks per month each month)

 Epub & Mobipocket (Exclusive to V.I.P. members)

To download this full book, simply select the format you desire below