BFC2140 MIDSEM Questions with
complete solution
Briefly describe three forms of business organization: a sole trader; a
partnership;
and companies. - correct answers A sole trader is a business owned by one
person.
A partnership consists of two or more owners joined together legally to
manage a
business.
Companies are legal entities able to do business in its own right.
Explain why there is an inverse relationship between interest rates (YTM) and
bond
prices. - correct answers As YTM increases beyond the coupon rate of a
bond, the bond price falls as it is no
longer as attractive an investment to other bonds of the same type that are
newly
issued at a higher coupon as set by the higher YTM. So the only rationale for
an
investor to buy the more poorly performing bond would be if its price fell by a
discount till the coupon paid on it represents a yield that matches higher YTM.
Should the credit rating of a bond be upgraded, what is the likely effect upon
the
required rate of return of the bond? - correct answers An upgrade in credit
rating represents a reduction in the default risk of the bond.
This will lower the required rate of return on the bond as investors would
require
, less compensation for lower default risk.
What is the capital budgeting process? Why is it so important? - correct
answers Capital budgeting is the process by which management decides
which
projects and productive assets the company should invest in. It involves
investing large amounts of money, can define a company's line of business,
and determine future profitability.
Why is NPV considered
to be superior to alternative methods? - correct answers 1. It uses the
discounted cas flow valuation approach (accounts for time value of money)
2. provides a direct measure of how much capital is needed for a project
3. It is consistent with goals of maximizing shareholders wealth
What is the Payback Period? Pros and Cons? - correct answers PP is a
measure of the time required for cash flows to cover the cost of a project.
Pros:
Simple, quick, easy to understand. It is a simple measure of liquidity risk as it
provides an estimate of how long it will take to get its money back
Cons:
Ignores time value of money, biased in favour of short-lived projects
What is ARR? Why is this method not recommended? - correct answers The
Accounting Rate of Return is based on accounting numbers, such as book
value and net
income, rather than cash flow data.
ARR = Average net income/average book value
complete solution
Briefly describe three forms of business organization: a sole trader; a
partnership;
and companies. - correct answers A sole trader is a business owned by one
person.
A partnership consists of two or more owners joined together legally to
manage a
business.
Companies are legal entities able to do business in its own right.
Explain why there is an inverse relationship between interest rates (YTM) and
bond
prices. - correct answers As YTM increases beyond the coupon rate of a
bond, the bond price falls as it is no
longer as attractive an investment to other bonds of the same type that are
newly
issued at a higher coupon as set by the higher YTM. So the only rationale for
an
investor to buy the more poorly performing bond would be if its price fell by a
discount till the coupon paid on it represents a yield that matches higher YTM.
Should the credit rating of a bond be upgraded, what is the likely effect upon
the
required rate of return of the bond? - correct answers An upgrade in credit
rating represents a reduction in the default risk of the bond.
This will lower the required rate of return on the bond as investors would
require
, less compensation for lower default risk.
What is the capital budgeting process? Why is it so important? - correct
answers Capital budgeting is the process by which management decides
which
projects and productive assets the company should invest in. It involves
investing large amounts of money, can define a company's line of business,
and determine future profitability.
Why is NPV considered
to be superior to alternative methods? - correct answers 1. It uses the
discounted cas flow valuation approach (accounts for time value of money)
2. provides a direct measure of how much capital is needed for a project
3. It is consistent with goals of maximizing shareholders wealth
What is the Payback Period? Pros and Cons? - correct answers PP is a
measure of the time required for cash flows to cover the cost of a project.
Pros:
Simple, quick, easy to understand. It is a simple measure of liquidity risk as it
provides an estimate of how long it will take to get its money back
Cons:
Ignores time value of money, biased in favour of short-lived projects
What is ARR? Why is this method not recommended? - correct answers The
Accounting Rate of Return is based on accounting numbers, such as book
value and net
income, rather than cash flow data.
ARR = Average net income/average book value
