Introduction
This workbook is offered as a learning resource to help you revise and prepare for the final exam. It is not
assessed. It is optional. But I believe it will assist you to do well in this subject.
I do not offer a selection of past exams, or sample exams, because students tend to focus on those questions,
ignoring the fact that the questions will be different on this semester’s exam! This workbook is designed to
give you practice at answering all the different types of question you might get on the final exam.
WORKBOOK STRUCTURE
The chapters of this workbook are divided into 4 sections (although not all types of questions are relevant to
all topics).
Section A – Multiple choice questions
There will be multiple choice questions on the final exam, which could come from any topic, and
therefore there are multiple choice questions in every chapter of this workbook.
Section B – Short answer questions
The short answer questions on the final exam could come from any topic, because all of them have
at least some theoretical components. They are worth a few marks each on the final exam, and
therefore you should only spend a few minutes on these questions. They do not require a detailed,
complex answer. You should focus on a brief explanation of the key issue in the question.
Section C – Essay questions
There will NOT be essay questions on the final exam, but they are included in this workbook because
they are an excellent opportunity to consolidate your understanding of the topics that have a major
theory component – Topic 1 (Introduction to Finance), Topic 2 (Time Value of Money), Topic 5 (Cost
of Capital), Topic 6 (Capital Budgeting), Topic 8 (Risk and Return) and Topic 9 (Portfolio Theory. If
you practice answering these questions you will be well-prepared for theory questions (both multiple
choice and short answer) on the final exam.
Section D – Calculation questions
These will come from the topics that have a major calculation component – Topics 2 & 3 (Time Value
of Money & Financial Mathematics), Topic 4 (Valuation of Securities), Topic 5 (Cost of Capital), Topics
6 & 7 (Capital Budgeting & Project Evaluation) and Topics 8 & 9 (Risk & Return and Portfolio Theory).
Many of these questions will be the same as the seminar questions, but that doesn’t mean you won’t benefit
from attempting those questions again
HOW TO USE THIS WORKBOOK
You may not have time to complete the entire workbook. If that is the case, you should focus on the topics
you have had most difficulty with and where you think you can benefit most from practice. You may also wish
to focus on the types of questions – e.g. theory or calculation questions – where you think you need most
improvement.
As well as being subdivided into sections for different types of questions, most chapters are also subdivided
into three parts – Questions; Hints, Tips, Advice & Guidance; and Solutions. Questions (in the first part of
the chapter) which have hints, tips, etc., in the second part of the chapter are denoted by an asterisk (*). You
may wish to refer to these if you are struggling to complete your answer.
You should refer to the solutions after you have completed your answers to the questions. In the case of
calculation questions, it is strongly recommended that you check the solution to each question before going
on to the next question. This will ensure that you receive prompt feedback in case you have made a mistake,
and because many questions rely on the answers to previous questions.
La Trobe University 4
Questions
SECTION A – MULTIPLE CHOICE QUESTIONS
- Which type of firm is the most common in the world (in terms of the number of businesses)?
(a) Sole traders
(b) Partnerships
(c) Corporations
(d) Not‐for‐profit organisations - Which type of firm dominates the economy throughout the world in terms of the total revenue generated?
(a) Sole traders
(b) Partnerships
(c) Corporations
(d) Not‐for‐profit organisations - What is the maximum number of non‐employee shareholders a private company can have?
(a) 2
(b) 3
(c) 50
(d) 100 - Which of the following is an example of an investment decision?
(a) Deciding whether to borrow money or issue new shares
(b) Deciding whether to build a new factory in Australia or New Zealand.
(c) Deciding whether to increase the level of dividend paid to shareholders.
(d) None of the above. - Which of the following is an example of a financing decision?
(a) A mining company deciding whether to deposit surplus cash into a bank account or purchase short‐term
securities.
(b) A manufacturer deciding whether to launch a new product.
(c) A credit union deciding whether to diversify into the provision of financial advice.
(d) A pharmaceutical company deciding whether to issue ordinary shares or preference shares to raise capital. - Which of the following is an example of a financial asset?
(a) Cash
(b) Accounts receivable
(c) Goodwill
(d) An ordinary share - Which of the following is the goal of the financial manager?
(a) Maximising net profit.
(b) Maximising market share.
(c) Maximising the value of the firm.
(d) All of the above.
La Trobe University 5 - Which of the following is not a way of expressing the goal of the financial manager?
(a) Maximising the wealth of shareholders.
(b) Maximising the share price.
(c) Maximising the value of the firm.
(d) Maximising the net profit of the firm. - Which of the following is not one of the three critical factors in finance?
(a) Risk
(b) Return
(c) Time
(d) Cash
Refer to the following information in answering Questions 10 and 11.
The following is a stock quote provided by Commonwealth Securities.
Last Bid Offer High Low Open Prev
42.65 42.63 42.66 43.50 41.79 42.99 43.02 - If you submit a “market order” to buy this stock, what price will you pay?
(a) 42.65
(b) 42.63
(c) 42.66
(d) 42.99 - If you submit a “market order” to sell this stock, what price will you receive?
(a) 42.65
(b) 42.63
(c) 42.66
(d) 42.99
La Trobe University 6
SECTION B – SHORT ANSWER QUESTIONS - What are the disadvantages of a sole trader as a type of firm?
- What are the advantages of a corporation as a type of firm?
- What are the differences between a private company and a public company?
- Other than managing day‐to‐day cash flow, what are the two main types of decisions made by a financial
manager? Give one example of each type of decision.
La Trobe University 7 - What is the difference between a real asset and a financial asset?
- What is the goal of the financial manager? Is there more than one way of expressing this goal?
- Choose one of the three critical factors in finance, and briefly explain its importance.
- Choose another of the three critical factors in finance, and briefly explain its importance. (I.e. Choose a factor
other than the one you chose for Question 18.)
La Trobe University 8 - Briefly explain importance of the third critical factor in finance (i.e. The factor other than the ones you chose
for Questions 18 and 19.) - What does it mean to say that a market is “liquid”? What is necessary for a market to be liquid?
- What does “ASX” stand for today? What did it stand for in the past? When (approximately) and why did the
change take place? - What is the difference between a primary market and a secondary market?
- What is the “bid” and what is the “ask” price on a stock exchange? Which is higher?
La Trobe University 9
SECTION C – ESSAY QUESTIONS - What are the three types of firm? Discuss the advantages and disadvantages of each of these types of firm.
La Trobe University 10 - What are the three critical factors in finance? Explain why they are important in the study of Finance.
La Trobe University 11 - What are the three main ways to issue shares? What are the advantages and disadvantages of each?
La Trobe University 12
Solutions
SECTION A – MULTIPLE CHOICE QUESTIONS - Which type of firm is the most common in the world (in terms of the number of businesses)?
(a) Sole traders
(b) Partnerships
(c) Corporations
(d) Not‐for‐profit organisations - Which type of firm dominates the economy throughout the world in terms of the total revenue generated?
(a) Sole traders
(b) Partnerships
(c) Corporations
(d) Not‐for‐profit organisations - What is the maximum number of non‐employee shareholders a private company can have?
(a) 2
(b) 3
(c) 50
(d) 100 - Which of the following is an example of an investment decision?
(a) Deciding whether to borrow money or issue new shares
(b) Deciding whether to build a new factory in Australia or New Zealand.
(c) Deciding whether to increase the level of dividend paid to shareholders.
(d) None of the above. - Which of the following is an example of a financing decision?
(a) A mining company deciding whether to deposit surplus cash into a bank account or purchase short‐term
securities.
(b) A manufacturer deciding whether to launch a new product.
(c) A credit union deciding whether to diversify into the provision of financial advice.
(d) A pharmaceutical company deciding whether to issue ordinary shares or preference shares to raise
capital. - Which of the following is an example of a financial asset?
(a) Cash
(b) Accounts receivable
(c) Goodwill
(d) An ordinary share
La Trobe University 13 - Which of the following is the goal of the financial manager?
(a) Maximising net profit.
(b) Maximising market share.
(c) Maximising the value of the firm.
(d) All of the above. - Which of the following is not a way of expressing the goal of the financial manager?
(a) Maximising the wealth of shareholders.
(b) Maximising the share price.
(c) Maximising the value of the firm.
(d) Maximising the net profit of the firm. - Which of the following is not one of the three critical factors in finance?
(a) Risk
(b) Return
(c) Time
(d) Cash
Refer to the following information in answering Questions 10 and 11.
The following is a stock quote provided by Commonwealth Securities.
Last Bid Offer High Low Open Prev
42.65 42.63 42.66 43.50 41.79 42.99 43.02 - If you submit a “market order” to buy this stock, what price will you pay?
(a) 42.65
(b) 42.63
(c) 42.66
(d) 42.99 - If you submit a “market order” to sell this stock, what price will you receive?
(a) 42.65
(b) 42.63
(c) 42.66
(d) 42.99
La Trobe University 14
SECTION B – SHORT ANSWER QUESTIONS
Note: The are not model answers. They are guidelines so you know whether you are on the right track. A more complete
answer will earn higher marks on an exam. You should NOT use bullet points on an exam, unless each bullet point contains a
complete sentence. Words and sentence fragments do not clearly communicate ideas. You should explain what you
understand about the question in your own words, using complete sentences. - What are the disadvantages of a sole trader as a type of firm?
It is not possible to separate ownership and control (allowing the raising of capital from investors)
The owner has unlimited liability for the firm’s debts
Life is limited to the life of the owner
Difficult to transfer ownership of the business - What are the advantages of a corporation as a type of firm?
Separation of ownership and control allows capital to be raised from non‐controlling investors
Owners have limited liability for the firm’s debts
The corporation exists indefinitely
Ownership is easily transferred - What are the differences between a private company and a public company?
Private company
About 2 million in Australia
Restricted to 50 non‐employee shareholders
Not required to appoint an auditor
Denoted by “Pty Ltd” (Proprietary Limited)
Public company
About 200,000 in Australia
Unlimited number of shareholders
Required to appoint an auditor and submit financial reports to ASIC
Denoted by “Ltd” (Limited) - Other than managing day‐to‐day cash flow, what are the two main types of decisions made by a financial
manager? Give one example of each type of decision.
Investment decisions
Which real assets to purchase to generate income for the firm
E.g. buying land, buildings, equipment, cars, computers
All decisions relating to which real assets to have on the balance sheet, so this includes decisions to
dispose of assets
Financing decisions
Which financial assets to issue to finance the investment decisions
E.g. issue shares and bonds, borrowing from a bank
All decisions relating to which financial assets to have on the balance sheet, so this includes buying
back shares, paying off loans and paying dividends
La Trobe University 15 - What is the difference between a real asset and a financial asset?
Real assets
Items on the left‐hand side of the balance sheet used to generate income for the firm (e.g. land,
buildings, equipment, vehicles, computers)
Financial assets
Issued by firms to raise capital
These are not used to generate income. They represent claims in income generated by real assets.
They are intangible – is the claim or right to receive income that is the asset. - What is the goal of the financial manager? Is there more than one way of expressing this goal?
The financial manager is appointed by the shareholders to manage the firm that they own and make decisions
on their behalf. Hence, the goal of the financial manager is to:
Maximise the wealth of shareholders
Maximise the value of the firm
Maximise share price
There are equivalent because the shareholders own the firm, and the value of the firm is equal to the number
of shares on issue times the share price. - Choose one of the three critical factors in finance, and briefly explain its importance.
Cash
Only cash can be used to purchase things, pay debts, satisfy consumption preferences and increase
the wealth of shareholders. Financial decisions must be made on the basis of cash, rather than on the
basis of non‐cash accounting book entries.
Time
Money has time value. The value of a dollar is different depending on when it is received. Decisions
involving cash flows at different points in time (which almost all financial decisions do) must take into
account the time value of money or else the cash flows being considered could be incorrectly valued.
Risk
The future is uncertain. The probability of receiving a future cash determines its value, and this
uncertainty, or risk, must be taken into account or future cash flows could be incorrectly valued. - Choose another of the three critical factors in finance, and briefly explain its importance. (I.e. Choose a factor
other than the one you chose for Question 18.)
See above. - Briefly explain importance of the third critical factor in finance (i.e. The factor other than the ones you chose
for Questions 18 and 19.)
See above. - What does it mean to say that a market is “liquid”? What is necessary for a market to be liquid?
Market participants are able to buy or sell quickly and at prices which reflect the true value of the
securities traded.
Many buyers and sellers willing to trade at close to the current market price.
La Trobe University 16 - What does “ASX” stand for today? What did it stand for in the past? When (approximately) and why did the
change take place?
Australian Securities Exchange. This was formed in 2006 when the Australian Stock Exchange merged
with the Sydney Futures Exchange. - What is the difference between a primary market and a secondary market?
Primary market
A market in which financial assets are first created and traded
The market in which cash flows from investors to the issuer of the financial asset
Secondary market
A market in which financial are subsequently traded among investors.
Cash does not flow to the issuers of the financial assets (but they still benefit from the existence of a
secondary market, because a liquid secondary market enhances the viability of the primary market,
and the secondary market establishes the value of the financial assets) - What is the “bid” and what is the “ask” price on a stock exchange? Which is higher?
The “bid” price is the price that other participants are “bidding”; i.e. the price at which they are
prepared to buy shares. It is therefore the price at which you can sell shares if you place a “market
order”.
The “ask” price is the price that other participants are “asking”; i.e. the price at which they are offering
to sell shares. It is also known as the “offer” price. It is therefore the price at which you can buy shares
if you place a “market order”.
When the market is open, the Ask will be higher than the Bid, which means you will buy at a higher
price than the price at which you can sell
The post Chapter 1 – Introduction to Finance appeared first on My Assignment Online.