Business 114 - Financial Decision
Making - Otago University Midterm Exam
Questions And All Correct Answers.
Investment decision (capital budgeting) - Answer the decision to build, buy, invest; to enter or
exit an industry
Financing Decision (capital structuring) - Answer How a firm choses to finance projects,
composition of long term debt and equity
Working Capital Management - Answer the managing of short-term assets and liabilities. All
day to day decisions
Sole Proprietorship - Answer Features:
Owned by a single person
Not separation of ownership or management
Advantages:
Simple (easy to form and wind up)
Least expensive and regulated form of business
No sharing of profit and loss
Taxed once as personal income
Disadvantages:
Limited access to capital
Costly to transfer ownership
Unlimited liability
limited partnership - Answer has both general partners who are owners and managers and
limited partners are owners who are not managers. Limited partners are not exposed lo
unlimited liablity.
General Partnership - Answer partnership in which partners share equally in management
responsibility and liability
, Agency Problem - Answer Agency problem is a potential agency cost (cost incurred because of
conflicts of interest between a principal and agent) to the firm which may diminish firm value.
Asset - Answer anything that generates cashflow
liability - Answer a thing for which someone is responsible for, commonly, an amount of
money owed
Time Value of Money - Answer the phrase time value of money refers to the fact that a dollar
in your hands today is worth more than a dollar promised at some time in the future. On a
practical level, one reason for this is that you could earn interest while you waited; so, a dollar
today would grow more that a dollar later. The trade off between money now and money later
thus depends on, among other things, the rate you can earn by investing.
Ordinary Perpetuity - Answer infinite stream of cash flows.
growing perpetuity - Answer a stream of cash flows that occurs at regular intervals and grows
at a constant rate forever.
ordinary annuity - Answer equal cash flows evenly spaced over a finite period. First cash flow
at t=1.
annuity due - Answer same as annuity but with first cash flow at t=0.
pure discount loan - Answer Loan where interest and principal paid are at maturity.
Interest only loan - Answer Interest is paid periodically and the principal is paid back at
maturity
Amortised Loan - Answer Most common loan type; equal payments are made, each payment
containing part interest, part principal. i.e. mortgage.
YTM - Answer yield to maturity, the interest rate required on a bond in the market
Making - Otago University Midterm Exam
Questions And All Correct Answers.
Investment decision (capital budgeting) - Answer the decision to build, buy, invest; to enter or
exit an industry
Financing Decision (capital structuring) - Answer How a firm choses to finance projects,
composition of long term debt and equity
Working Capital Management - Answer the managing of short-term assets and liabilities. All
day to day decisions
Sole Proprietorship - Answer Features:
Owned by a single person
Not separation of ownership or management
Advantages:
Simple (easy to form and wind up)
Least expensive and regulated form of business
No sharing of profit and loss
Taxed once as personal income
Disadvantages:
Limited access to capital
Costly to transfer ownership
Unlimited liability
limited partnership - Answer has both general partners who are owners and managers and
limited partners are owners who are not managers. Limited partners are not exposed lo
unlimited liablity.
General Partnership - Answer partnership in which partners share equally in management
responsibility and liability
, Agency Problem - Answer Agency problem is a potential agency cost (cost incurred because of
conflicts of interest between a principal and agent) to the firm which may diminish firm value.
Asset - Answer anything that generates cashflow
liability - Answer a thing for which someone is responsible for, commonly, an amount of
money owed
Time Value of Money - Answer the phrase time value of money refers to the fact that a dollar
in your hands today is worth more than a dollar promised at some time in the future. On a
practical level, one reason for this is that you could earn interest while you waited; so, a dollar
today would grow more that a dollar later. The trade off between money now and money later
thus depends on, among other things, the rate you can earn by investing.
Ordinary Perpetuity - Answer infinite stream of cash flows.
growing perpetuity - Answer a stream of cash flows that occurs at regular intervals and grows
at a constant rate forever.
ordinary annuity - Answer equal cash flows evenly spaced over a finite period. First cash flow
at t=1.
annuity due - Answer same as annuity but with first cash flow at t=0.
pure discount loan - Answer Loan where interest and principal paid are at maturity.
Interest only loan - Answer Interest is paid periodically and the principal is paid back at
maturity
Amortised Loan - Answer Most common loan type; equal payments are made, each payment
containing part interest, part principal. i.e. mortgage.
YTM - Answer yield to maturity, the interest rate required on a bond in the market
