1. Briefly explain the goal(s) of the financial manager of a corporate form of b

Question

1. Briefly explain the goal(s) of the financial manager of a corporate form of business organization.

2. Explain briefly the role of Primary Markets and Secondary Markets. Is an initial public offering (IPO) a primary market transaction or a secondary market transaction.

3. Briefly explain the concept of working capital and list down the components of working capital.

4. What is the difference between simple interest and compound interest? Illustrate your answer. Which one will you prefer as an investor.

5. State the difference between an annuity and a perpetuity.

6. Explain the basic difference between debt and equity?

7. Briefly explain the differences between preferred and common stock. If you are the investor which one will you prefer and why?

8. What are the different kinds of risk in finance.

9. You currently have AED90,000 and plans to purchase a 6-year certificate of deposit (CD). How much will you have when the CD matures if it pays 7% interest, compounded annually? 10. Norwegian Adventures offers a 7% coupon bond with annual payments. The yield to maturity is 8% and the maturity date is 7 years from today. What is the market price of this bond if the face value is $1,000?

11. A 10-year government bond with a face value of $ 1,000 pays a coupon of 8% annually. The compounded interest rate is 9%.

a) Calculate the present value of the bond.

b) Generate a table showing how the bond’s present value changes for annually compounded interest rates between 1% and 15%.

c) What can you deduce about the relationship between the bond price and the yield to maturity (YTM)?

12. a). State whether True or false? Explain The value of share equals the discounted stream of future earnings per share.

b). Consider the following two stocks:

a. Stock A is expected to provide a dividend of $10 a share forever.

b. Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% a year forever. If the market capitalization rate for each stock is 10%, which stock is the most valuable? What if the capitalization rate is7%?

Explanation / Answer

1. The finance manager is responsible for raising capital - both debt as well as equity - at the most reasonable cost and allocate the same for the most efficient usage within the firm. The finance manager will also be deciding on the mix of financing choice (between debt / equity / hybrid) basis the relative merit, cost and suitability to the business. In addition to raising external capital, the finance manager will also over see how the financial resources are utilised within the firm and will be responsible for the optimal usage. The reporting function - accounting and treasury - will also be uner the purview of the finance manager.

2. Primary markets are where the borrower or users of funds access to raise capital from savers of funds (or providers of funds) . It plays an important role by bringing together the provides and users of funds, so that the capital in the economy can move to the best use and lead to improvement and economic growth. The secondary markets are where the securities issued in the primary markets are traded and they do not result in any incremental flow to the borrower/user of funds but they provide liquidity to the primary market investors and also helps in price discovery which is very important for proper funcitoning of markets.

3. Working capital is basically the capital required by a company for its operations from purchase of raw materials to final realisation of cash from sales. It will start from purchase of raw materials, which the company will convert into goods (using labour and capital) and these goods will be sold . The capital required in this entire cycle is working capital and its calculated as Current Assets - Current Liabilities. It is also a measure of how effectively a company can convert its resources into cash.

4. Simple interest is where an investor gets paid the interest on principal periodically but in compound interest the interest earned is also added into principal and this interest also earns interest in the subsequent periods. Hence compound interest leads to interest on interest is preferred. We can take a simple example of $100 invested at 10% for 2 years:

Simple Interest will $ 10 each year

Compound interest will lead to first year $10 interest being added to principal and in the second year the investor will get $11 interest which will include $1 on interest earned in the year 1

5. Annuity is when there is specific fixed cash flow received (or being paid) at periodic intervals as a result on lumpsum investment. A perpetuity is similar but unlike annuity which has a specific maturity date, a perpetuity as the name suggest is perpetual with no maturity date

6. The key difference is that debt is a fixed obligation where as equity gives right to residual cash flows and comes with owbership rights. The debt payments are tax deductible unlike equity where the payments to equity holders are after paying all the other stake holders but then they have right to the entire residual left.

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