Semester Test 1

Question 1

Define financial management

Answer 1

-Planning, organising, directing and controlling the financial acts of the org

Question 2

What are the key objectives of financial management

Answer 2

-Create wealth for the business
-Generate cash
-Provide adequate ROI bearing in mind risks that the org is taking and the resources invested

Question 3

What are the 3 elements to the process of financial management

Answer 3

-Financial Planning
-Financial Control
-Financial decision-making

Question 4

Define Financial Planning

Answer 4

Management must ensure that enough funding is available @ all times to meet objectives (short, medium and long-term)

Question 5

Define Financial control

Answer 5

Financial control addresses Q’s like
-Are assets being used efficiently?
-Are the business assets secure?

Question 6

Define financial decision making

Answer 6

-Key aspects of financial decision making relate to
»Investment
»Financing
»Dividends

Question 7

List and explain the three aspects that determine
the price volatility of a bond.

Answer 7

-Time to maturity
»the longer the outstanding term = more sensitive the bond price
-Coupon rate
»the lower the coupon rate = more sensitive the bond’s price
-Yield
»the lower the yield of a bond = more volatile the price of the bond

Question 8

Provide objectives of a FM

Answer 8

-Ensure regular and adequate supply of funds to the concern
-Ensure optimum funds utilization
-Ensure safety of investment

Question 9

What is the role of a FM

Answer 9

-Business management
-Goal achievement
-Management of cash
-Investment of cash

Question 10

What are the forms of orgs

Answer 10

-CC’s
-Companies
-Partnerships
-Sole Proprietors

Question 11

What is the goal of a FM

Answer 11

Maximize shareholder wealth

Question 12

Describe the decision making process

Answer 12

-Step 1: Identify objectives
>Specify Co’s objectives
-Step 2: Search for alternative course of action
»Look for strats that might assist in achieving goals
-Step 3: Select appropriate alternative course of action
»Course that best responds to the objective
-Step 4: Implement decision
»Implement course of action as part of long-term planning process
-Step 5: Compare actual and planned outcomes
»Performance reports should be prepared
-Step 6: Respond to divergence from plan

Question 13

Define risk

Answer 13

The degree of uncertainty and/or potential financial loss inherent in an investment decision

Question 14

True or False
Effective int rate is always higher than nominal int rate?

Answer 14

True

Question 15

Define critical thinking

Answer 15

The analysis of facts to form a judgement

Question 16

Core activities of critical thinking

Answer 16

-Analysis
-Evaluation

Question 17

A claim is justified if…

Answer 17

-… it can be shown beyond reasonable doubt to be true, and
-… it can be shown to have a high probability

Question 18

A number is divisible by 3 if…

Answer 18

…when all the number in it are added up, if the ans = divisible of 3 then OG # divisble by 3

Question 19

A number is divisible by 4 if…

Answer 19

…if the last 2 digits are divisble by 4

Question 20

A number is divisible by 6 if…

Answer 20

…its an even number and its divisible by 3 also

Question 21

A number is divisible by 7 if…

Answer 21

… when you double the last digit and minus from remaining digit of OG, if answer is a MULTIPLE of 7, then OG (w/ all #s) = divisible

Question 22

A number is divisible by 8 if…

Answer 22

… last 3 digits are divisibly by 8

Question 23

A number is divisible by 9 if…

Answer 23

… if sum of all number is divisible by 9, OG is divisible

Question 24

1000g = 1kg = 1 000 000mg
1g = 0.001kg = 0.000 001mg

Answer 24

same w/ litres

Question 25

What are the types of interest rates?

Answer 25

-Money market rate -Call money rates -Capital market rated -LIBOR (London Interbank Offered Rate) -Repo Rate -Prime interest rate

Question 26

Define the repo rate and provide its current %

Answer 26

-Its the rate @ which the central bank of a country lends money to commercial banks in the event of any shortfall of funds -=8.25%

Question 27

Define the prime int rate and provide its current %

Answer 27

-The lowest rate to which a clearing bank will lend to its clients on overdraft -=9%

Question 28

How are int rates in SA determined

Answer 28

SARB sets them in response to whats happening and whats expected to happen in the economy

Question 29

Define a bond

Answer 29

A contract btwn lenders and a borrowing org, typically a firm/govt body

Question 30

What are characteristics of bonds

Answer 30

-It represents borrowed funds -bondholders receive periodic int payments -Have no voting rights Bonds have a fixed maturity

Question 31

Calc work 1) Time to maturity = 2) Par value/Face value = 3) Market value = 4) Coupon rate = 5) Yield to maturity

Answer 31

1) N 2) FV 3) PV 4) PMT 5) I/Y

Question 32

Define a debenture

Answer 32

Loan stock (corporate bonds) which are secured on some or all of the assets of the Co

Question 33

What are the type of debentures

Answer 33

-Mortgage debentures -Floating charge debentures

Question 34

What are the investment characteristics of debentures

Answer 34

**Risk** >Risk of default and secured assets value is not enough to cover the loan >The rights of debenture holders are overseen by trustees (eg banks) **Return** >Carry risk and not always marketable **Marketability** >Worse than govt bonds

Question 35

What are the characteristics of debentures

Answer 35

-Int payments are tax deductible -Have a fixed redemption date and carry a fixed rate of int

Question 36

What are the characteristics of unsecured loan stocks

Answer 36

-No specific security for the loan -Ranked equally w/ other creditors of the issuing Co

Question 37

What are the investment characteristics of unsecured loan stock

Answer 37

**Risk** >No security but more secured than ordinary shares **Return** >Yields are higher than debentures and govt stocks to compensate for poorer marketability **Marketability** >Similar to debentures but worse than govt stocks

Question 38

What are the investment characteristics of share capital

Answer 38

**Risk** >Uncertainty and volatility of future income **Return** >High potential return for high risk **Marketability** >Depends on the size of the Co and future profit growth, but usually marketable

Question 39

What are the investment characteristics of preference shares

Answer 39

**Risk** >Ranked between loan capital and above OS if the Co is liquidated >Risk is higher than holding loan stock but return is higher **Return** >For all investors, the expected return on PS is likely to be less the OSs because risk of PS is less **Marketability** >Similar to loan capital

Question 40

Whats the difference btwn PS and OS

Answer 40

PS dividends are limited to a fixed amount