BSNS 114 Exam Questions And Correct
Answers With Complete Solution.
The main objective in financial decision making is:
To maximise the value of the business - more narrow;y by maximising the share value
of the company and therefore shareholder wealth.
What is the investment decision (Capital budgeting)?
Selecting long term assets/projects that will create value for the business
What is the financing decision (capital structuring)?
Deciding how a business will fund their investment decisions ( i.e choosing a mixture of
debt and equity that will be used to finance the long term assets).
What is the working capital management decision?
Decisions which dealing with a firms day-to-day operations (affects current assets and
current liabilities).
ABC corp deciding whether it should finance its new machine by taking out a
bank loan is an example of what?
Financing decision.
Red Ltd deciding whether it should open a new store is an example of what?
Investment decision.
J&J Co. making sure they have enough money to manage the day to day
production of their product is an example of what?
Capital management
What are the two ways a business can raise money?
Debt and equity
Sole Proprietorship is
Simple to set up, unlimited liability, one owner, business taxes paid as individual tax
A general partnership is
Relatively easy to set up, unlimited liability, two or more owners, difficult to transfer
ownership
A corporation is
Costly to establish, limited liability, separate from its owners as a legal entity.
What is meant by the term limited liability?
The liability of the owner is limited to the amount they have invested in the company. If
the business goes bankrupt, shareholders personal assets are not liable to repay debts.
What is meant by the term agency problem and what is an example?
There is a significant degree of separation between shareholders and managers in large
companies, which means it is difficult for shareholders to have control over managers.
This creates a conflict of interest as managers may pursue their self interests over
maximising shareholders' wealth. This gives rise to an agency cost because this conflict
of interest may reduce the value of the firm. Some examples include the manager
holding back important news and wasting firm resources for personal use.
What are some ways to reduce agency costs?
, Monitor the managers and develop compensation agreements linking their
compensation to company performance.
What are the functions of primary markets?
A firm issues new security and sells them to investors - the initial public offering (IPO) is
the first offering of a corporation's shares to the public, which is facilitated by an
investment bank (underwriter).
- allows a company to raise funds
What are the functions of secondary markets?
Securities are traded between investors without the involvement of the firm
- investors can buy and sell securities on the market. there is liquidity as securities can
be easily sold and converted into cash.
- The trading of bonds is facilitated by a dealer
Trading of shares is facilitated by a broker.
What is present value?
What the investment is worth today
What is future value?
What the investment will be worth in a future period (after earning interest)
What is discounting?
Transforming future cash into todays cash amount. Given the time value of money, a
dollar today is worth more than it would be tomorrow.
What is simple interest?
Interest rate applied on the principles only (the principle is the amount borrowed or
deposited)
What is a compound interest?
Where the interest rate is applied to the initial principle invested and any accumulated
interest earned too (we are also earning interest on interest).
All else constant and assuming positive interest rates, the present value of a
positive future cash amount will _________ if the interest rate goes down
Increase
Cash Flow occur evenly spaced intervals of time
Equal size
Finite CF's
Occur at the end of payment period
Ordinary annuity
Cash Flow occur evenly spaced intervals of time
Not equal size - they grow by constant rate
Infinite CF's
Occur at the end of payment period
Growing perpetuity
CF's occur evenly spaced periods of time
Equal size
Infinite CF's
CF's occur at the end of every payment
Ordinary perpetuity
CF's occur evenly spaced periods of time
Equal size
Answers With Complete Solution.
The main objective in financial decision making is:
To maximise the value of the business - more narrow;y by maximising the share value
of the company and therefore shareholder wealth.
What is the investment decision (Capital budgeting)?
Selecting long term assets/projects that will create value for the business
What is the financing decision (capital structuring)?
Deciding how a business will fund their investment decisions ( i.e choosing a mixture of
debt and equity that will be used to finance the long term assets).
What is the working capital management decision?
Decisions which dealing with a firms day-to-day operations (affects current assets and
current liabilities).
ABC corp deciding whether it should finance its new machine by taking out a
bank loan is an example of what?
Financing decision.
Red Ltd deciding whether it should open a new store is an example of what?
Investment decision.
J&J Co. making sure they have enough money to manage the day to day
production of their product is an example of what?
Capital management
What are the two ways a business can raise money?
Debt and equity
Sole Proprietorship is
Simple to set up, unlimited liability, one owner, business taxes paid as individual tax
A general partnership is
Relatively easy to set up, unlimited liability, two or more owners, difficult to transfer
ownership
A corporation is
Costly to establish, limited liability, separate from its owners as a legal entity.
What is meant by the term limited liability?
The liability of the owner is limited to the amount they have invested in the company. If
the business goes bankrupt, shareholders personal assets are not liable to repay debts.
What is meant by the term agency problem and what is an example?
There is a significant degree of separation between shareholders and managers in large
companies, which means it is difficult for shareholders to have control over managers.
This creates a conflict of interest as managers may pursue their self interests over
maximising shareholders' wealth. This gives rise to an agency cost because this conflict
of interest may reduce the value of the firm. Some examples include the manager
holding back important news and wasting firm resources for personal use.
What are some ways to reduce agency costs?
, Monitor the managers and develop compensation agreements linking their
compensation to company performance.
What are the functions of primary markets?
A firm issues new security and sells them to investors - the initial public offering (IPO) is
the first offering of a corporation's shares to the public, which is facilitated by an
investment bank (underwriter).
- allows a company to raise funds
What are the functions of secondary markets?
Securities are traded between investors without the involvement of the firm
- investors can buy and sell securities on the market. there is liquidity as securities can
be easily sold and converted into cash.
- The trading of bonds is facilitated by a dealer
Trading of shares is facilitated by a broker.
What is present value?
What the investment is worth today
What is future value?
What the investment will be worth in a future period (after earning interest)
What is discounting?
Transforming future cash into todays cash amount. Given the time value of money, a
dollar today is worth more than it would be tomorrow.
What is simple interest?
Interest rate applied on the principles only (the principle is the amount borrowed or
deposited)
What is a compound interest?
Where the interest rate is applied to the initial principle invested and any accumulated
interest earned too (we are also earning interest on interest).
All else constant and assuming positive interest rates, the present value of a
positive future cash amount will _________ if the interest rate goes down
Increase
Cash Flow occur evenly spaced intervals of time
Equal size
Finite CF's
Occur at the end of payment period
Ordinary annuity
Cash Flow occur evenly spaced intervals of time
Not equal size - they grow by constant rate
Infinite CF's
Occur at the end of payment period
Growing perpetuity
CF's occur evenly spaced periods of time
Equal size
Infinite CF's
CF's occur at the end of every payment
Ordinary perpetuity
CF's occur evenly spaced periods of time
Equal size
