BSNS114 Exam Questions And
Answers
Define working capital management decision - Answer Deals with day to day financial
matters and affect current assets, current liabilities
Define investment decision - Answer Determine what long term productive assets the
firm will purchase (tangible/intangible)
What is the difference between tangible and intangible long term assets? - Answer
Tangible assets - physical existence (land, product, factory)
Intangible assets - non physical (patent, contract, etc.)
Define financing decision - Answer Determine the mix of long term debt and equity that
will be used to finance the firm's long term productive assets
What are the features of sole proprietorship? - Answer Business owned by a single
person
No separation of ownership and management
One person responsible for providing capital and managing the business
What are the advantages of sole proprietorship? - Answer Easy to form and end
Least expensive and regulated form of business
No sharing of profit and loss
Taxed once as personal income
What are the disadvantages of sole proprietorship? - Answer Limited access to capital
Costly to transfer ownership
Unlimited liability
What are the features of a partnership? - Answer Two or more owners have jointed
legally to manage a business and share its profits
What is the difference between a general partnership and a limited partnership? -
Answer In a general partnership all partners are owners and managers
In a limited partnership there are both general partners who are owners and managers
and limited partners who are owners but not managers
What are the advantages of a partnership? - Answer Two or more owners
,More capital available
Relatively easy to start
Income taxed once as personal income
What are the disadvantages of a partnership? - Answer Unlimited liability (general
partnership)
Partnership dissolves when one partner die or wishes to sell
Difficult to transfer ownership
Define incorporation - Answer Legal process used to form a corporate entity (company)
What are the advantages of a corporation? - Answer Separate from its owner its owners
legal entity
Easy transfer of ownership
Limited liability (protects the personal assets of founders of the company in case of
bankruptcy
What are the disadvantages of a corporation? - Answer Separation of ownership and
management may create conflicts of interest
All profits are taxed at a corporate tax rate
Costly to establish and register
Define agency problem - Answer Potential agency cost
Cost incurred because of conflicts of interest between a principal and agent
Give examples of an agency problem - Answer Managers make decisions that hurt firm
value, and as a result hurt shareholder's wealth
Managers lie to shareholders by holding back news about the company, fabricate
financial reports
Managers can waste firm resources to satisfy personal need
What are some disciplinary mechanisms for the agency problem? - Answer
Shareholders annual meeting
Board of directors
Compensation plan (incentives such as salary bonus connected to performance)
Why does the shareholder's annual meeting often fail in practice? - Answer Most
shareholders do not show up to meetings because they are not important enough
, Large shareholders if dissatisfied sell stock and move on
Why does the board of directors often fail in practice? - Answer Board members do not
work because no one polices them
Why does a compensation plan often fail in practice? - Answer May induce managers to
take company killing risks
Removes inherent satisfaction in doing their job
How does a firm raise money? - Answer The firm will trade securities (debt and equity) in
exchange for funds from savers (who have a surplus of resource)
What do investors get back in exchange? - Answer Debt holders have percentage of
interest on money lent returned, Principal is also returned, and contractual obligation
Shareholders have ownership claims and share in profit
What is the primary market? - Answer Firm issues new securities and sell them to
investors in the Initial Public Offering
Cash is exchanged between firm and investors
Facilitated by investment bank
What is the secondary market? - Answer Securities trade between investors without
involvement of the firm
Cash is exchanged between investors only
Facilitated by a dealer (buyers/sellers) and and a broker (who trades on behalf of
others)
NZ stock exchange, NZ debt exchange
What is FV? - Answer Principal + interest earned
Future value is what investment is worth after earning interest for one or more periods
What is PV? - Answer Present value is what the investment is worth today
What is r? - Answer The rate of return - or the interest rate/discount rate
What is simple interest? - Answer Applied on principal only
What is interest on interest? - Answer Earned upon the reinvestment of interest
payments
What is compound interest? - Answer Interest rate is applied to principal and
accumulated interest
How do you apply compounding frequency? - Answer r/n
Answers
Define working capital management decision - Answer Deals with day to day financial
matters and affect current assets, current liabilities
Define investment decision - Answer Determine what long term productive assets the
firm will purchase (tangible/intangible)
What is the difference between tangible and intangible long term assets? - Answer
Tangible assets - physical existence (land, product, factory)
Intangible assets - non physical (patent, contract, etc.)
Define financing decision - Answer Determine the mix of long term debt and equity that
will be used to finance the firm's long term productive assets
What are the features of sole proprietorship? - Answer Business owned by a single
person
No separation of ownership and management
One person responsible for providing capital and managing the business
What are the advantages of sole proprietorship? - Answer Easy to form and end
Least expensive and regulated form of business
No sharing of profit and loss
Taxed once as personal income
What are the disadvantages of sole proprietorship? - Answer Limited access to capital
Costly to transfer ownership
Unlimited liability
What are the features of a partnership? - Answer Two or more owners have jointed
legally to manage a business and share its profits
What is the difference between a general partnership and a limited partnership? -
Answer In a general partnership all partners are owners and managers
In a limited partnership there are both general partners who are owners and managers
and limited partners who are owners but not managers
What are the advantages of a partnership? - Answer Two or more owners
,More capital available
Relatively easy to start
Income taxed once as personal income
What are the disadvantages of a partnership? - Answer Unlimited liability (general
partnership)
Partnership dissolves when one partner die or wishes to sell
Difficult to transfer ownership
Define incorporation - Answer Legal process used to form a corporate entity (company)
What are the advantages of a corporation? - Answer Separate from its owner its owners
legal entity
Easy transfer of ownership
Limited liability (protects the personal assets of founders of the company in case of
bankruptcy
What are the disadvantages of a corporation? - Answer Separation of ownership and
management may create conflicts of interest
All profits are taxed at a corporate tax rate
Costly to establish and register
Define agency problem - Answer Potential agency cost
Cost incurred because of conflicts of interest between a principal and agent
Give examples of an agency problem - Answer Managers make decisions that hurt firm
value, and as a result hurt shareholder's wealth
Managers lie to shareholders by holding back news about the company, fabricate
financial reports
Managers can waste firm resources to satisfy personal need
What are some disciplinary mechanisms for the agency problem? - Answer
Shareholders annual meeting
Board of directors
Compensation plan (incentives such as salary bonus connected to performance)
Why does the shareholder's annual meeting often fail in practice? - Answer Most
shareholders do not show up to meetings because they are not important enough
, Large shareholders if dissatisfied sell stock and move on
Why does the board of directors often fail in practice? - Answer Board members do not
work because no one polices them
Why does a compensation plan often fail in practice? - Answer May induce managers to
take company killing risks
Removes inherent satisfaction in doing their job
How does a firm raise money? - Answer The firm will trade securities (debt and equity) in
exchange for funds from savers (who have a surplus of resource)
What do investors get back in exchange? - Answer Debt holders have percentage of
interest on money lent returned, Principal is also returned, and contractual obligation
Shareholders have ownership claims and share in profit
What is the primary market? - Answer Firm issues new securities and sell them to
investors in the Initial Public Offering
Cash is exchanged between firm and investors
Facilitated by investment bank
What is the secondary market? - Answer Securities trade between investors without
involvement of the firm
Cash is exchanged between investors only
Facilitated by a dealer (buyers/sellers) and and a broker (who trades on behalf of
others)
NZ stock exchange, NZ debt exchange
What is FV? - Answer Principal + interest earned
Future value is what investment is worth after earning interest for one or more periods
What is PV? - Answer Present value is what the investment is worth today
What is r? - Answer The rate of return - or the interest rate/discount rate
What is simple interest? - Answer Applied on principal only
What is interest on interest? - Answer Earned upon the reinvestment of interest
payments
What is compound interest? - Answer Interest rate is applied to principal and
accumulated interest
How do you apply compounding frequency? - Answer r/n
