BSNS 114 final exam Questions And Correct Answers, With Complete Verified Solution. 119 Q&A

BSNS 114 final exam Questions And Correct Answers, With Complete Verified Solution. 119 Q&A The objective of a business To maximise the value of the business by maximising stockholder wealth. (as share price increases stockholder wealth increases) Three ways to maximise firm value Investment decision, financing decision, working capital management decision The investment decision is about Acquiring profitable assets The financing decision is about How to finance production and development The working capital management decision is about having enough inventory to produce your product or service Accounts receivable the money you should receive from selling resources but you haven't received the money yet What does the working capital management decision deal with day-to-day financial matters and effect current assets and current liabilities What does the investment decision deal with they determine what long term productive assets the firm will purchase What does the financing decision deal with they determine the mix of debt and equity that will be used to finance the firms long term productive assets Accounts payable Goods you have but have not paid for Sole propriertorship a type of business where one person is responsible for providing capital and managing the business Advantages of Sole Proprietorship simple to establish, least expensive and regulated, no sharing profit or loss, taxed once as personal income, no separation between ownership and management Disadvantages of Sole Proprietorship Limited access to capital Costly to transfer ownership Unlimited liability Partnership a business owned by two or more people General partnership all of the partners are owners and active in managing business- all liable for everything Limited partnership has limited partners who are owners but not managers and general partners (limited partners are only liable for what they put into the business) Advantages of partnership Two or more owners, More capital available, Relatively easy to start, Income taxed once as personal income Disadvantages of partnership Unlimited liability Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership Corporation A business that is owned by many investors. Advantages of a corporation Limited liability Separation of ownership and management (someone can increase the value of the business on your behalf) Transfer of ownership is easy Easier to raise capital Disadvantages of a corporation Separation of ownership and management (agency problem) Taxation (income taxed at the corporate rate) Costly to establish and register Agency problem the possibility of conflict of interest between the stockholders and management of a firm because firm manager will not always work to increase firm value Managers can make decisions that hurt firm value Shareholders want to be profitable even if it is risky opposed to managers who want to play is safe to still have a job Managers can lie to shareholders They can hold back good/bad news about the company, fabricate accounting statements and financial reports Managers can waste firm resources to satisfy personal needs Theory: Shareholders annual meeting Shareholders gather to evaluate managers performance In practice: shareholders annual meeting it is too costly for shareholders to go, when large shareholders with significant holding are dissatisfied they sell their stock and move on In theory; board of directors body that oversees all significant business transactions and management of the firm In practice: board of directors they often fail at their assigned role which is to protect interests of shareholder because they work very little and often cannot challenge the power of managers in theory: compensation plan tying compensation to performance review (i.e. if company does well their is an increase in salary) In practice: compensation plan it may induce managers to take company killing risks Debt-holder (bondholders) is an investor who holds a debt instrument most commonly a bond which is a fixed income instrument that represents a loan made by an investor to a borrower Equity Refers to ownership of a company Financial markets facilitates transfer of funds from investors to companies and provides a marketplace to transfer those securities Financial institutions An institution whose business is to bring together savers with money to invest or lend with other firms that need money Primary financial market when they initially sell securities which is facilitated by an investment bank Securities Any financial asset that can be traded e.g. bonds Secondary financial market shares are traded between investors facilitated by a dealer and broker Functions of financial markets - Assist companies to obtain large amounts of capital - enable the government to finance fiscal deficit (government spendingincome) - enable to satisfy the investment needs of both corporate firms and investors - allow investors to trade securities among themselves Interest rate (r) Uncertainty risk premium + inflation premium (adjustment for inflation and risk) + time preference (base rate) Simple interest FV=PV x (1 + r x t) Compound interest FV=PV x (1 + r)^t Compound interest components principal, simple interest and interest on interest APR annual percentage rate is an annualised interest rate using simple interest EAR effective annual rate is an annual growth rate that takes compounding into account Ordinary perpetuity CF's are equally spaced in time, they are equal in size and they are infinite Growing perpetuity CF's are equally spaced in time, they are infinite and the first CF occurs starting from one period from now and they grow by a constant growth rate, g. Ordinary annuity CF's are equally spaced in time, they are equal in size, the first CF occurs starting one period from now, CF's are a finite number Annuity due CF's are equally spaced apart, there is an infinite number, they occur at the beginning of the payment period Pure discount bonds