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Principles of Finance Mid-Term

Submitted to: Dr. Muhammad Ayaz

Submitted by: Haiqa Malik

Registration: 2019-BBA-027

Class : BBA (A) - IV

Date of submission: 31-04-21

Question: 1
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a)
The objective of the manager is to maximize the current value per share of the existing stock,
to do this he will identify investments and financing arrangements that favourably impact the
value of the stock. To increase the market value the manager will try to
1) Maximize his profits
2) Minimize costs
3) Maximize sales
4) Maintain steady earnings growth
5) Avoid bankruptcy
6) Beat the competition

b)
Sole proprietorship:

A Sole proprietorship is a business owned by one person. Many large corporations start out as small
proprietorships.

Advantages:

1) The owner of a sole proprietorship keeps all the profits.

Limitations:

1) The life of a sole proprietorship is limited to the owner’s life span and the amount of equity
that can be raised is limited to the amount of the proprietor’s personal wealth. Due to this
limitation a business cannot exploit new opportunities because of insufficient capital.

2) Ownership of a may be difficult to transfer because transfer requires the sake of the entire
business to a new owner.

3) The owner has unlimited liability, the creditors can go beyond business assets to proprietors
personal assets for payments.

Partnership:

A partnership is a business owned by two or more owners. Advantages and disadvantages of

partnership are same as those of proprietorship

In a general partnership all partners share in gains and losses and all have an unlimited liability for all
partnership debts. The partnership terminates when a general partner wishes to sell out or dies. All
income tax is taxed as personal income to the partners and the amount of equity that can be raised is
limited to the partner’s common wealth. Ownership of a general partnership is can easily transferred
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because a transfer requires a new partnership to be formed. A partner is a general partnership can be
held responsible for all partnership debts so for that purpose having written agreements is important.

Disadvantages:

1) Unlimited liability for business debts on part of owners

2) Limited life of a business

3) Partnership of business terminates when any one partner dies or wishes to sell.

Corporation:

A corporation is a legal “person”, it is separate and distinct from its owners, and has its own rights,
duties, privileges as that of an actual person. Corporations can borrow money, own property, can sue
and can be sued, and enter into contracts. Forming a corporation involves preparing articles of an
incorporation and a set of bylaws. These articles must contain the corporation’s name, its intended
life, its business purpose, and the number of shares that can issued. This information must be supplied
to the state in which the firm will be incorporated. The bylaws are the rules that describe how the
corporation regulates its existence. Because a corporation is a legal person, it mu

Advantages:

Easy to transfer ownership

Limited liability for debts

Unlimited life of business

Disadvantages:

As it is a legal person it must pay taxes.

Money paid to stockholders in the form of dividends are taxed again as income to the
stockholders, this is double taxation

Corporation types:

The corporate form of organization has many variations around the world, the exact laws and
regulation differ from country to country but the essential features of public ownership and
limited liability remain. These forms are often called joint stock companies, public limited
companies and limited liability companies.
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Question 2
a)

b)
The four main statements that the annual reports includes is the balance sheet, income
statement, cash flow statement and statement of retained earnings.
1) Balance sheet
The balance sheet is the financial statement for showing the firms accounting value on a
particular date. It is also called the statement of final position. It shows what the firm
owns that is its assets, what a firm owes that its liabilities and the different between these
two is the firm’s equity.
Assets:
Assets can be either fixed or current, fixed assets are those which have long life, it
converts to cash within a year. They can be intangible assets such as equipment and
supplies. The intangible assets are those that have no physical existence such as patents
and copyrights. Non- current assets takes longer than a year or operating cycle to convert
to cash for example equipment.
Liabilities:
They can be either long term or short term.
Shareholder’s equity:

2) Income statement
It is a financial statement that summarizes the firm’s performance over a period of time.
It focuses on the revenues and expense of the firm. If the revenue is more than the
expenses then the difference would be net income and if expenses would be more that the
difference would be more net loss.
Income statement in case of sole proprietorship:
All the income that comes will belong to the person who started the sole
proprietorship .Business. Suppose a company which was established in 2019 and in 2020
it would have generated some income. That income would belong to the owner of the sole
business.
Income statement in case of partnership:
The accounting equation in case of partnership would be
Assets = liabilities + equity + profit (income - expenses)
Income statement in case of corporation:
In case of corporation, the accounting corporation is broken down like this
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Assets = liabilities + common stock – dividend + revenue – expenses.

The net income that is the revenue and expense part of this equation would be distributed
to the owners. And could be used for long term investment in the future and also be spent
on other business shares.
3) Cash flow statement:
It is the financial statement that summarizes the sources and uses of cash over a specific
time period from financing activities, operating activities and interesting activities.. In the
terminology of finance we say cash inflow and cash outflow.
Operational activities:
In this type of activity we will mention the type of cash which would come and go due to
an operation. Like for example salary payment. We can measure operating activities
through two ways that is direct and indirect.
Investment activities:
Those investments which cause cash inflow and cash outflow.in investment activity if a
company purchases shares that would cause an outflow and the dividend we get would be
the inflow. Consider an example in which you bought a building (that is investment). The
payment that you did to buy the building will be the cash outflow. Now you have given
that building on rent. The money you will get in return will be the cash inflow.
Financing activities:
Those activities which involve financing and cash to outflow and inflow. Suppose you
have a business and you take a loan. That would be the inflow of cash and then that
payment of the loan will act as the outflow of cash.
4) Statement of retained earnings
It is the financial statement that outlines the changes in the retained earnings for a
company over a period of time. It uses information regarding

Question 3
a)
Given:
Future value (FV): 10,000
Present value (PV): ?
Interest (i): 9 %
Time (n): 3
Formula:
PV = FV / (1 + i)n
Solution:
PV = 10,000 / (1 + 0.09) 3
PV = 10,000 / (1.09)3
PV = 10,000 / 1.295029
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PV = 7721.8348 (Answer)
b)

Given:
Future value (FV): ?
Present value (PV): 12,000
Interest (i): 7 %
Time (n): 3
Solution:
FV = pv (1 + r/m)n
FV = PV (1 + 0.07/365)42
FV = PV (1.008086)
Fv = 120970.385

Question 4
A
Given:
Future value (FV):?
Present value (PV): 100,000,000
Interest (i): 0.06
Time (n): 10
Formula:
FV = PV (1 + i )n

Solution:
FV = 100,000,000 (1 + 0.06) 10
FV = 100,000,000 (1.06) 10
FV = 100,000,000 (1.7908)
FV = 179084769.7
b)

Given:
Future value (FV): 5,000
Present value (PV):?
Interest (i): 9.5 %
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Time (n): 15
Formula:
PV = FV / (1 + i)n
Solution:
PV = 5000 / (1 + 0.095) 15
PV = 5000 / (1. 095) 15
PV = 5000 / 3.9013
PV = 1281.6168

PV = FV / (1 + i)n
FV = PV (1 + i )n
FV = PV * eit
PV = FV * e-it
FV = PMT × {[(1 + i)n – 1 ] ÷ i }
PV = FV × {[1 - (1 + i)-n ] ÷ i }
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