FMA101 FIM262 (STADIO) Assignment
1 (QUALITY ANSWERS) Semester 1
2026-Semester 2 2026
Financial market - answer-A place where investors, firms, and governments meet to buy
and sell financial assets; issuers sell assets for cash today; investors buy assets to
receive cash in the future
Financial asset - answer-A claim on future cash flows (e.g. loans, stocks, bonds)
Primary market - answer-The market where issuers obtain funding by selling newly
created financial assets for the first time
Secondary market - answer-The market where investors buy and sell existing securities
among themselves; the issuing corporation is not directly involved but still benefits
because it provides liquidity that makes investors willing to invest in the first place
Why are secondary markets important for issuers? - answer-They provide liquidity to
investors — without being able to sell later, investors would be unwilling to buy in the
primary market, restricting the issuer's future access to capital
Corporation - answer-A legal entity owned by its shareholders with limited liability;
shareholders cannot be held personally responsible for the firm's debts and are residual
claimants on assets after all other claims are paid
Limited liability - answer-Shareholders' losses are capped at their initial investment; they
are not personally liable for corporate debts
Residual claimant - answer-A shareholder's right to what remains after all other
creditors and claimants have been paid
Investment decision (financial manager) - answer-Deciding which real assets to invest
in — tangible (plants, machinery) and intangible (brand names, R&D) — to maximise
value; corresponds to the asset side of the balance sheet
Financing decision (financial manager) - answer-Deciding how to fund investments —
debt vs equity, public vs private — and how to return cash to shareholders (dividends or
buybacks); corresponds to the liability side of the balance sheet
Goal of financial management - answer-To maximise the current market value of
shareholders' investments in the firm
, Opportunity cost of capital - answer-The return shareholders forgo by not investing in
financial markets — the benchmark against which the firm's investment returns should
be compared
Finance method — time value of money - answer-The principle that cash flows
occurring at different times are not directly comparable; all cash flows must be
expressed in common (usually present-value) terms using a discount rate
How does a firm create value (investment vs financing)? - answer-Mostly through
investment decisions on the asset side; financing decisions also create value in
imperfect markets (taxes, asymmetric information)
Separation of ownership and control - answer-In large corporations, shareholders own
the firm but professional managers make decisions; can lead to agency problems if
incentives are misaligned
Valuation Principle - answer-Use competitive market prices to convert all cash flows into
common terms; identify cash flows, find the appropriate discount rate, and compute
present value
Discount rate — two components - answer-r = rf + Risk Premium; rf compensates for
time (delaying consumption); the risk premium compensates for uncertainty/risk
Present Value (PV) - answer-The value today of a future cash flow: PV = CFt / (1+r)^t;
the cash cost today of replicating the future cash flow yourself
Discount factor - answer-DF = 1/(1+r)^t — the present value of a £1 payment received
in period t
NPV (Net Present Value) - answer-NPV = PV(Benefits) − PV(Costs); the additional
value created for the firm and its shareholders by taking the project
NPV decision rule - answer-Accept all projects with NPV > 0 (equivalent to receiving
NPV in cash today); reject NPV < 0; choose the highest NPV alternative
Why is NPV independent of investor preferences? - answer-Because investors can
borrow/lend at the discount rate to shift cash flows through time; the firm's investment
decision is separate from individual timing preferences (Separation Principle)
Where does positive NPV come from? - answer-Real asset investments generate
positive NPV because of competitive advantages — proprietary technology, patents,
barriers to entry, information advantages, specialised expertise
Law of One Price - answer-If equivalent investment opportunities trade simultaneously
in different competitive markets, they must trade at the same price; otherwise there is
an arbitrage opportunity
1 (QUALITY ANSWERS) Semester 1
2026-Semester 2 2026
Financial market - answer-A place where investors, firms, and governments meet to buy
and sell financial assets; issuers sell assets for cash today; investors buy assets to
receive cash in the future
Financial asset - answer-A claim on future cash flows (e.g. loans, stocks, bonds)
Primary market - answer-The market where issuers obtain funding by selling newly
created financial assets for the first time
Secondary market - answer-The market where investors buy and sell existing securities
among themselves; the issuing corporation is not directly involved but still benefits
because it provides liquidity that makes investors willing to invest in the first place
Why are secondary markets important for issuers? - answer-They provide liquidity to
investors — without being able to sell later, investors would be unwilling to buy in the
primary market, restricting the issuer's future access to capital
Corporation - answer-A legal entity owned by its shareholders with limited liability;
shareholders cannot be held personally responsible for the firm's debts and are residual
claimants on assets after all other claims are paid
Limited liability - answer-Shareholders' losses are capped at their initial investment; they
are not personally liable for corporate debts
Residual claimant - answer-A shareholder's right to what remains after all other
creditors and claimants have been paid
Investment decision (financial manager) - answer-Deciding which real assets to invest
in — tangible (plants, machinery) and intangible (brand names, R&D) — to maximise
value; corresponds to the asset side of the balance sheet
Financing decision (financial manager) - answer-Deciding how to fund investments —
debt vs equity, public vs private — and how to return cash to shareholders (dividends or
buybacks); corresponds to the liability side of the balance sheet
Goal of financial management - answer-To maximise the current market value of
shareholders' investments in the firm
, Opportunity cost of capital - answer-The return shareholders forgo by not investing in
financial markets — the benchmark against which the firm's investment returns should
be compared
Finance method — time value of money - answer-The principle that cash flows
occurring at different times are not directly comparable; all cash flows must be
expressed in common (usually present-value) terms using a discount rate
How does a firm create value (investment vs financing)? - answer-Mostly through
investment decisions on the asset side; financing decisions also create value in
imperfect markets (taxes, asymmetric information)
Separation of ownership and control - answer-In large corporations, shareholders own
the firm but professional managers make decisions; can lead to agency problems if
incentives are misaligned
Valuation Principle - answer-Use competitive market prices to convert all cash flows into
common terms; identify cash flows, find the appropriate discount rate, and compute
present value
Discount rate — two components - answer-r = rf + Risk Premium; rf compensates for
time (delaying consumption); the risk premium compensates for uncertainty/risk
Present Value (PV) - answer-The value today of a future cash flow: PV = CFt / (1+r)^t;
the cash cost today of replicating the future cash flow yourself
Discount factor - answer-DF = 1/(1+r)^t — the present value of a £1 payment received
in period t
NPV (Net Present Value) - answer-NPV = PV(Benefits) − PV(Costs); the additional
value created for the firm and its shareholders by taking the project
NPV decision rule - answer-Accept all projects with NPV > 0 (equivalent to receiving
NPV in cash today); reject NPV < 0; choose the highest NPV alternative
Why is NPV independent of investor preferences? - answer-Because investors can
borrow/lend at the discount rate to shift cash flows through time; the firm's investment
decision is separate from individual timing preferences (Separation Principle)
Where does positive NPV come from? - answer-Real asset investments generate
positive NPV because of competitive advantages — proprietary technology, patents,
barriers to entry, information advantages, specialised expertise
Law of One Price - answer-If equivalent investment opportunities trade simultaneously
in different competitive markets, they must trade at the same price; otherwise there is
an arbitrage opportunity
