TUT 1

4. Three areas in FinanceuFinancial

Management (also called corporate finance)
- How much and what types of assets to acquire?
- How to raise capital needed to purchase assets?
- How to run the firm to maximize its value
Investments
- Security analysis deals with finding proper values of individual asset.
- Portfolio theory deals with the best way to structure portfolio.
- Market analysis deals with the issue of whether stock and bond markets at any given
time are “too high,” “too low,” or “about right.”
Capital markets –study of
- Financial instruments such as stocks and bonds
- Financial institutions that supply capital to business.
- Government organizations who are the main players in the market.
5. What are the four types of firms? What are advantages and disadvantages of each type? Why
do corporations dominate the economy?
- Sole proprietorship: Unlimited Liability Personal tax on profits
- Partnership:
Advantages: of formation, Subject to few regulations, No corporate income taxes
Disadvantages
; Difficult to raise capital, Unlimited liability, Limited life corporation
6. What are the financial decisions made by a manager of a firm? Give two examples of each
type.
- Investing decisions: How much should we invest and what assets should we invest in?
Example #1
Let us assume that Quinn possesses $12000 in her savings account. She decides to invest, but
her priority is low risk and high liquidity
. Her portfolio manager suggests XYZ mutual funds. This mutual fund allocates 75% of her
money into debentures & bonds and 25% into stocks. Also, she can withdraw funds at any time
Example #2
Caisse de Depot et Placement du Quebec (CDPQ) and DP World plan co-invested $5 billion into
three prominent UAE assets:
• Jebel Ali Port (JAP) established a trade corridor between the east and the west,
• Jebel Ali Free Zone (JAFZ) is the world’s largest free zone located in the middle east,
• National Industries Park (NIP) spread its manufacturing and processing companies across
21sq. Km of area.
As a consequence of the investment, CDPQ gained an expansive exposure—a logistics chain
comprising 8700 global companies—3.5 billion-plus consumers worldwide. In 2021, these
assets yielded an overall revenue of $1.9 billion.
- Financing decisions: How much the cash required for the operation of the firm be raised? –
debt financing vs. equity financing
EXAMPE: Financing decision: company decided to borrow $3million from a bank to finance its
expansion project.
- Dividend policy: How to pay to shareholders
EXAMPLE: company decided to pay 40% of its earnings as cash dividend to its shareholders.
8. What are the three critical factors in finance? Discuss the importance of these factors
values, opportunities and capabilities
9. What is the primary objective of corporate financial decision making?
Long-term Growth and Effect:
Financial decisions are concerned with the long-term use of assets. These assets are very
helpful in the process of production. Profit is also earned by selling the goods that are
produced. This can, therefore, be accurate decisions. The greater the growth of business in the
long run, the more effective the decision needs to be. In addition to that, these affect the future
prospect of the business.
Large Amount of Funds Involved:
Funds are the base of this business decision. Decisions regarding the fixed assets are included in
the context of capital budgeting. Huge capital is invested in these assets. If these decisions turn
out to be a flaw, then it will cause heavy loss of capital which is indeed a scarce resource.
Risk Involved:
Capital budgeting decisions come with risks. There are two reasons for the risk factor to be
involved in it. First, these decisions are analyzed for a long period, and thus the expected profits
for several years are to be anticipated which even lead to fluctuations. These are human
estimations which may turn out to be wrong. Secondly, as a heavy investment is involved, it is
very difficult to change the decision once it has been taken.
Irreversible Decisions:
Nature of these decisions is irreversible, once taken it cannot be reformed. For instance, if soon
after setting up a sugar mill, the owner thought of changing it, then the old machinery used for
the purpose and other fixed assets will have to be sold at a loss. In doing this, the heavy loss will
have to be incurred by the owner.
7.
10. An agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in the best interest of another.
Agency problems arise when incentives or motivations present themselves to an agent to not
act in the full best interest of a principal.
Through regulations or by incentivizing an agent to act in accordance with the principal's best
interests, agency problems can be reduced.
11.
. What is a firm’s intrinsic value? Its current stock prices? Is the stock’s “true “long-run value
more closely related to its intrinsic value or to its current price?

PART 2
1. Is an initial public offering an example of a primary or a secondary market transaction?
Explain
An initial public offering, or IPO, is an example of a primary market. These trades provide an
opportunity for investors to buy securities from the bank that did the initial underwriting
fora particular stock. An IPO occurs when a private company issues stock to the public for
the first time.