Financial decision making – UOM
Questions with verified answers.
What is finance? - Correct Answer Finance is concerned with decisions involving the valuation of future
cash flows and what affects these values.
What are the main elements of finance? - Correct Answer 1. money
2. time
3. uncertainty or risk
4. information
5. taxation
What are examples of investing in shares? - Correct Answer 1. Monetary return in the future (a)
dividends, (b) capital gain 2. Both are uncertain when you make the investment
3. Information (a) resolves uncertainty (b) asymmetrically shared
4. Taxation (a) after-tax returns
What are the different perspectives of finance? - Correct Answer 1. Corporate finance
2. Investments
3. Financial intermediaries and markets
4. Government
What impacts the status of finance? - Correct Answer • Theoretical research develops models/theories
to explain financial phenomena or to value securities (future cash flows)
• Theories to explain
- relative prices of different securities
- share price movements
- companies' dividend decisions
What are the advantages and disadvantages of the unincorporated business structure? - Correct Answer
sole traders, partnerships
,Advantages
☺ cheap and easy to establish
☺ ownership & control concentrated
☺ no requirement to publish accounts
Disadvantages
- difficult to sell -> finite life
- business = owner -> unlimited liability
- difficult to raise funds to grow
What are the advantages and disadvantages of the incorporated business structure? - Correct Answer
separate legal identity from its owners: Companies limited by shares—private, PLCs
Advantages
☺ ownership can be transferred by selling shares infinite life
☺ business is legally separate from its owners limited liability
☺ funds can be raised publicly through equity and debt markets
Disadvantages
- difficult and expensive to establish
- tax disadvantages
- management is separate from owners requirement to publish accounts
What are the characteristics of PLC? - Correct Answer • established by shareholders
• financed by share and debt capital
• share capital — permanent
• debt capital — money borrowed for fixed period
• shareholders — residual owners, limited liability
• shareholders elect Board of Directors
• Board appoint managers
, How do business structures differ in other countries? - Correct Answer • The definition of 'partnership' is
different across Europe - In the UK, partnership is deemed to be a corporate entity whereas in Germany
(PartG) it isn't.
• Directors of incorporated firms in Europe are elected in two main ways - In single-tier board countries
(UK, Ireland, Sweden) shareholders elect board of directors who then select the managers. - In two-tier
board countries (Denmark, Germany, the Netherlands) there are two boards. The executive board
manages the day to day operations and reports to the supervisory board which monitors the executive
board's performance.
• Incorporated firms have many variations around the world - They are called different names: joint
stock companies, public limited companies, limited liability companies
What are financial markets and intermediaries? - Correct Answer They are money and capital markets
which allow investors to buy and sell financial claims (securities) and facilitate this exchange.
What is a primary stock market? - Correct Answer companies raise new equity finance by issuing new
securities. The original sale of securities by governments and corporations to the general public occurs in
the primary market.
What is a secondary stock market? - Correct Answer investors buy and sell existing shares
(a) information motivated (b) liquidity motivated
Advantages
☺ investment v. borrowing horizons
☺ liquidity / marketability
☺ active market gives correct valuations
What is future value? - Correct Answer Future value is the amount a sum, of money grows to as, it earns
interest over a period
What is compound interest? - Correct Answer each period's interest earns interest in future periods
What is annuity? - Correct Answer A series of regular and constant cash flows for a period.
Questions with verified answers.
What is finance? - Correct Answer Finance is concerned with decisions involving the valuation of future
cash flows and what affects these values.
What are the main elements of finance? - Correct Answer 1. money
2. time
3. uncertainty or risk
4. information
5. taxation
What are examples of investing in shares? - Correct Answer 1. Monetary return in the future (a)
dividends, (b) capital gain 2. Both are uncertain when you make the investment
3. Information (a) resolves uncertainty (b) asymmetrically shared
4. Taxation (a) after-tax returns
What are the different perspectives of finance? - Correct Answer 1. Corporate finance
2. Investments
3. Financial intermediaries and markets
4. Government
What impacts the status of finance? - Correct Answer • Theoretical research develops models/theories
to explain financial phenomena or to value securities (future cash flows)
• Theories to explain
- relative prices of different securities
- share price movements
- companies' dividend decisions
What are the advantages and disadvantages of the unincorporated business structure? - Correct Answer
sole traders, partnerships
,Advantages
☺ cheap and easy to establish
☺ ownership & control concentrated
☺ no requirement to publish accounts
Disadvantages
- difficult to sell -> finite life
- business = owner -> unlimited liability
- difficult to raise funds to grow
What are the advantages and disadvantages of the incorporated business structure? - Correct Answer
separate legal identity from its owners: Companies limited by shares—private, PLCs
Advantages
☺ ownership can be transferred by selling shares infinite life
☺ business is legally separate from its owners limited liability
☺ funds can be raised publicly through equity and debt markets
Disadvantages
- difficult and expensive to establish
- tax disadvantages
- management is separate from owners requirement to publish accounts
What are the characteristics of PLC? - Correct Answer • established by shareholders
• financed by share and debt capital
• share capital — permanent
• debt capital — money borrowed for fixed period
• shareholders — residual owners, limited liability
• shareholders elect Board of Directors
• Board appoint managers
, How do business structures differ in other countries? - Correct Answer • The definition of 'partnership' is
different across Europe - In the UK, partnership is deemed to be a corporate entity whereas in Germany
(PartG) it isn't.
• Directors of incorporated firms in Europe are elected in two main ways - In single-tier board countries
(UK, Ireland, Sweden) shareholders elect board of directors who then select the managers. - In two-tier
board countries (Denmark, Germany, the Netherlands) there are two boards. The executive board
manages the day to day operations and reports to the supervisory board which monitors the executive
board's performance.
• Incorporated firms have many variations around the world - They are called different names: joint
stock companies, public limited companies, limited liability companies
What are financial markets and intermediaries? - Correct Answer They are money and capital markets
which allow investors to buy and sell financial claims (securities) and facilitate this exchange.
What is a primary stock market? - Correct Answer companies raise new equity finance by issuing new
securities. The original sale of securities by governments and corporations to the general public occurs in
the primary market.
What is a secondary stock market? - Correct Answer investors buy and sell existing shares
(a) information motivated (b) liquidity motivated
Advantages
☺ investment v. borrowing horizons
☺ liquidity / marketability
☺ active market gives correct valuations
What is future value? - Correct Answer Future value is the amount a sum, of money grows to as, it earns
interest over a period
What is compound interest? - Correct Answer each period's interest earns interest in future periods
What is annuity? - Correct Answer A series of regular and constant cash flows for a period.
