Finance Conceptual Questions And Answers|100% correct|very helpful

Finance Conceptual Questions And Answers 1. What are the Financial Statements of a company and what do they tell about a company? Answer: Financial Statements of a company are statements, in which the company keeps a formal record about the company’s position and performance over time. The objective of Financial Statements is to provide financial information about the reporting entity that is useful to exist and potential investors, creditors, and lenders in making decisions about whether to invest, give credit or not. There are mainly three types of financial statements which a company prepares. 1. Income Statement – Income Statement tells us about the performance of the company over a specific account period. Financial performance is given in terms of revenue and expense generated through operating and non-operating activities. 2. Balance Sheet – Balance Sheet tells us about the position of the company at a specific point in time. Balance Sheet consists of Assets, Liabilities and Owner’s Equity. The basic equation of Balance Sheet: Assets = Liabilities + Owner’s Equity. 3. Cash Flow Statement – Cash Flow Statement tells us the amount of cash inflow and outflow. Cash Flow Statement tells us how the cash present in the balance sheet changed from last year to the current year. 2) What is a clean and dirty price of a bond? Ans. Clean price is a price of a coupon bond not including the interest accrued. In other words, clean price is the present value of the discounted future cash flows of a bond excluding the interest payments. Dirty price of a bond includes accrued interest in the calculation of bond. Dirty price of the bond is the present value of the discounted future cash flows of a bond which include the interest payments made by the issuing entity. 3) What are Stock Options? Ans. Stock Options are the options to convert into common shares at a predetermined price. These options are given to the employees of the company in order to attract them and make them stay longer. The options are generally provided by the company to its upper management to align management’s interests with that of its shareholders. Stock Options generally have a venting period i.e. a waiting period before the employee can actually exercise his or her option to convert into common shares. A Qualified option is a tax-free option which means that they are not subject to taxability after the conversion. An Unqualified option is a taxable option which is taxed immediately after conversion and then again when the employee sells the stock. Terms and answers to learn We can imagine the financial manager doing several things on behalf of the firm’s stockholders. For example, the manager might do the following: a. Make shareholders as wealthy as possible by investing in real assets. b. Modify the firm’s investment plan to help shareholders achieve a particular time pattern of consumption. c. Choose high- or low-risk assets to match shareholders’ risk preferences. d. Help balance shareholders’ checkbooks. However, in well-functioning capital markets, shareholders will vote for only one of these goals. Which one will they choose? a. Make shareholders as wealthy as possible by investing in real assets Which of the following are investment decisions, and which are financing decisions? Should we stock up with inventory ahead of the holiday season? Investment decision Which of the following are investment decisions, and which are financing decisions? Do we need a bank loan to help buy the inventory? Financing decision Which of the following are investment decisions, and which are financing decisions? Should we develop a new software package to manage our inventory? Investment decision Which of the following are investment decisions, and which are financing decisions? With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse. Investment decision Which of the following are investment decisions, and which are financing decisions? With the savings we make from our new inventory system, it may be possible to increase our dividend. Financing decision Which of the following are investment decisions, and which are financing decisions? Alternatively, we can use the savings to repay some of our long-term debt. Financing decision Which of the following forms of compensation is most likely to align the interests of managers and shareholders? A fixed salary A salary linked to company profits A salary that is paid partly in the form of the company’s shares A salary that is paid partly in the form of the company’s shares Expenditure on research and development (Financial decision or Investment decision) Investment decision A bank loan (Real asset or Financial asset) Financial asset Listed on a stock exchang