Midterm Questions - FIN512

1. What is Finance?
- Finance is defined as the art and science of money management which includes
activities such as investing, borrowing, lending, budgeting, saving, and forecasting.
2. Describe or explain or discuss how finance is related to other disciplines?
- Finance is connected to many other fields because it deals with managing money and
making financial decisions. It uses economic principles to understand markets, relies
on accounting for financial analysis, and uses math and statistics to assess risks. Use
Legal regulations and contracts also influence finance, and it considers how people's
behaviour Sciences affects financial choices. Finance also interacts with marketing
decisions and evaluates the financial impact of operations. This connection helps in
making smart financial decisions and understanding the overall economic
environment.
3. What are the main areas under the disciplines of finance?
1. Corporate finance: Deals with financial decisions within corporations, such as

capital budgeting, capital structure, working capital management, dividend policy,
and financial analysis.
2. Investments: Focuses on the analysis of various investment options and portfolio

management to optimize returns while managing risks.
3. Financial markets and institutions: Financial institutions are businesses that deal
primarily in financial matters. Ex: Banks and insurance companies
4. International finance: Examines financial transactions and decision-making in the

context of global markets and international trade.
4. What is Corporate Finance?
- Corporate Finance focuses on managing and making financial decisions within

corporations to maximize shareholder value and achieve financial goals.
5. Why is the topic of personal finance and public finance not covered or discussed in
this course?
- Personal Finance and public Finance may not be covered in this course because it is
not a business subject and is not related to business activities or entity.
6. Explain or define the three Decisions of Financial Management (Capital Budgeting
or Capital Structure or Working Capital Management). Support your answer with
examples.
1. Capital budgeting: The process of planning and managing a firm’s long-term

investments.
Ex: For a large retailer such as Walmart, deciding whether to open another store
would be an important capital budgeting decision.
2. Capital structure: is the mixture of long-term debt and equity the firm uses to
finance its operations.
Ex: Apple, a technology giant, has made capital structure decisions to finance its
operations and expansion.
3. Working capital management: refers to a firm’s short-term assets, such as
inventory, and its short-term liabilities, such as money owed to suppliers.
Ex: Amazon, focuses on effective management of working capital to support the
supply chain and the fast-paced business process
7. What is the main authority or determined under the CFO?
- The vice president or the chief financial officer (CFO) of finance coordinates the
activities of the treasurer and the controller.
o Treasurer – oversees cash management, credit management, capital expenditures
and financial planning.
o Controller – oversees taxes, cost accounting, financial accounting, and data
processing.
8. Define the type of Financial Markets.
1- Primary Market: where new securities, such as stocks and bonds, are issued and sold
by companies, governments, or other entities directly to investors.
2- Secondary markets: one creditor or owner selling to another.
9. Compare the primary market and secondary market.
Where New Securities Are First Issued and Sold by Companies to Raise Capital.
Primary
The Focus Is on Raising Funds for The Issuing Companies.
Market
Direct Transactions Between Companies and Investors.
Where Existing Securities Are Bought and Sold Among Investors.
Secondary
Provides Liquidity to Investors and Allows Them to Trade Securities.
Market
Indirect Transactions Between Investors.
10. Define the business organization, and what the advantages and disadvantages of
each form.
OR
11. Define the sole proprietorship, and what the advantages and disadvantages of sole
proprietorship are?
1- Sole Proprietorship: Business owned and operated by a single individual.
Advantages: Disadvantages
Easy to set up and dissolve. Unlimited liability
Least regulated. Limited to life of owner
Single owners keep all the profits. Difficult to sell ownership interest.
Equity capital is limited to the owner’s
Taxed once as personal income.
personal wealth.
2- Partnership: Business owned and operated by two or more individuals.
Advantages: Disadvantages
Two or more owners Unlimited liability
More capital available Partnership dissolves when one partner
dies or wishes to sell
Relatively easy to start Difficult to transfer ownership
Income taxed once as personal income
o General Partnership: All partners have equal responsibility and liability.

o Limited Partnership: Some partners have limited liability, while others have more
liability.
3- Corporation: A legal entity separate from its owners, providing limited liability for
shareholders.
Advantages Disadvantages
Unlimited life Separation of ownership and
management
Separation of ownership and
management
Transfer of ownership is easy Double taxation (income taxed at the
corporate rate and then dividends taxed
Easier to raise capital at the personal rate)
o S-Corporation: Corporation electing a special tax status to avoid double taxation.

o Limited Liability Company (LLC): A flexible business structure offering limited
liability protection for its members.
12. Compare between the forms of Business Organization (Sole proprietorship /
Partnership / Corporation).
Comparison Sole Proprietorship Partnership Corporation

Partners have
Owner has unlimited Shareholders have
Liability unlimited personal
personal liability limited liability
liability
Formation
Owned a single Owned by two or Legal entity owned by
and
individual. more individuals shareholders
Ownership
Involves a board of
Decision- Owner makes all Made jointly by the directors, management,
making decisions partners and shareholders' voting
rights.
May end to exist upon
May dissolve if
the owner's death or
Continuity one partner leaves Perpetual existence
decision to close.
or passes away
Partners contribute Easier access to capital
Limited access to
Capital capital, but still through the issuance of
capital
limited. stocks and bonds.
13. What is the Agency Problem, why does it exist, and what are the remedies?
What: Conflict of interest between principal and agent.

Why it exists: it exists due to the separation of ownership and control in corporations,
Stockholders (principals) hire managers (agents) to run the company.
What are the:
Incentives: Giving rewards like bonuses or special benefits can encourage the people in
charge to work in the best interest of the company and its owners.
Aligned interest: Making sure that the people in charge have a personal interest in the success
of the company.
Shares: Offering company shares to employees or management can help align their interests
with those of the shareholders.

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1. What is Finance?

2. Describe or explain or discuss how finance is related to other disciplines?

3. What are the main areas under the disciplines of finance?

1. Corporate finance: Deals with financial decisions within corporations, such as

2. Investments: Focuses on the analysis of various investment options and portfolio

4. International finance: Examines financial transactions and decision-making in the

4. What is Corporate Finance?

- Corporate Finance focuses on managing and making financial decisions within

1. Capital budgeting: The process of planning and managing a firm’s long-term

8. Define the type of Financial Markets.

2- Secondary markets: one creditor or owner selling to another.

9. Compare the primary market and secondary market.

1- Sole Proprietorship: Business owned and operated by a single individual.

2- Partnership: Business owned and operated by two or more individuals.

o General Partnership: All partners have equal responsibility and liability.

o S-Corporation: Corporation electing a special tax status to avoid double taxation.

Comparison Sole Proprietorship Partnership Corporation

What: Conflict of interest between principal and agent.

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