1.

Question: What are the main branches of finance and the key features
of each branch?

 Money and capital markets

 Investments
 Financial management

Key Takeaway Money and capital markets

 The money market is a short-term lending system. Borrowers tap it for the cash they need
to operate from day to day. Lenders use it to put spare cash to work.

 The capital market is geared toward long-term investing. Companies issue stocks and
bonds to raise money to grow their businesses. Investors buy them to share in that
growth.
 The money market is less risky than the capital market while the capital market is
potentially more rewarding.

What Is an Investment?

An investment is an asset or item acquired with the goal of generating

income or appreciation.

KEY TAKEAWAYS
 Foreign portfolio investment is the purchase of securities of foreign
countries, such as stocks and bonds, on an exchange.
 Foreign direct investment is building or purchasing businesses and their
associated infrastructure in a foreign country.
 Direct investment is seen as a long-term investment in the country's
economy, while portfolio investment can be viewed as a short-term move to
make money.
 Direct investment is likely only suitable for large corporations, institutions,
and private equity investors.

Financial management

Financial management in a business means planning and directing the use of the company’s
financial resources – the cash it generates through its operations and the capital obtained from
investors or lenders. Although a company may have an accounting staff or an outside accounting
firm to provide financial guidance, financial management is one of the most important aspects of the
business owner’s job. Financial management involves decisions such as business expansion,
financing options, credit terms, inventory levels, working capital levels, mergers and acquisitions
and so on.
2. Question: Briefly outline the evolution of financial management over the last century.
 Early 1900s – Emphasis was on legal aspects of mergers, formation of new
firms, and the various forms of securities firms could use to raise capital
 Depression of the 1930s – Bankruptcy and re-organization, corporate
liquidity, and the regulation of securities market.
 1940s and early 1950s – Focus on theoretical analysis.
 Late 1950s – Emphasis shifted to managerial decisions designed to
maximize the value of the firm.
 Towards the end of twentieth century – Maximization of value continued
 Early twenty first century – Globalization of businesses and extensive use
of technology

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3. Question: What are the main forms of business organizations and
the advantages and disadvantages of each?

 Sole proprietorships
 Sole partnerships
 Limited companies/corporations

Sole Proprietorships
This is an unincorporated business owned by one individual. One advantage of a
sole proprietorship is that the owner makes all the decisions
(a) Advantages:
 Ease of formation
 Inexpensive
 Subject to few regulations
 No corporate income taxes

(b) Disadvantages:
 Difficult to raise capital
 Unlimited personal liability
 Limited life

Partnerships
A partnership is a form of business whereby two or more persons come together
to conduct a business using an incorporated form.
One major advantage of a partnership is funding. Each owner can help with financing, start-up
costs, or ongoing business expenses. Another advantage is shared knowledge and experience.
However, one main disadvantage is that to share any profit with his partner. The percentage split
would be agreed upon by each partner or may equal a percentage of what they put in to start the
business.

Advantages of a partnership include that:

 two heads (or more) are better than one

 your business is easy to establish and start-up costs are low
 more capital is available for the business
 you’ll have greater borrowing capacity
 partners’ business affairs are private
 there is limited external regulation
 It’s easy to change your legal structure later if circumstances change.

Disadvantages of a partnership include that:

 the liability of the partners for the debts of the business is unlimited
 each partner is ‘jointly and severally’ liable for the partnership’s debts; that is,
each partner is liable for their share of the partnership debts as well as being
liable for all the debts
 there is a risk of disagreements and friction among partners and management
 each partner is an agent of the partnership and is liable for actions by other
partners

Limited Liability Companies/Corporations

This is a business organization created through legal instrument such that it is a

distinct and separate entity from the owners and managers.
(a) Advantages
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital

(b) Disadvantages
 Double taxation
 High cost of set-up and report filing
 4. What is the primary goal of a commercial company/business?
The primary goal of a commercial organization is to generate profit for its owners
or stakeholders while maintaining corporate social responsibility and should
always be trying to improve, grow, and become more efficient. Setting goals
provides the clearest way to measure the success of the company.
This type of business entity comprises one or more people or companies in the
public or private sector that work together and share the same mission and
goals.

A commercial company here is regarded as one whose primary objective is to

maximize net present value and to increase the wealth of its shareholders.
Hence in the case of a commercial company, the primary objective of its
management should be to maximize the wealth of the shareholders. This means
managing the company such that the share price of the company’s stock is
continually increasing.

Questions:

(a) Why is it important for an organization to display social

responsibility?

KEY TAKEAWAYS

 Being a socially responsible company can bolster a company's image and

build its brand.
 Social responsibility empowers employees to leverage the corporate
resources at their disposal to do good.
 Formal corporate social responsibility programs can boost employee
morale and lead to greater productivity in the workforce.

However, it’s also important because:

 Employees expect it: People want to work at companies they can be passionate
about, and one way to do it is through volunteer and donation opportunities
 It makes companies more marketable: Standing out from the competition can be
challenging when the marketplace is already crowded. However, companies that
demonstrate an obligation to various philanthropic causes are generally perceived as
more marketable than companies whose social responsibility activities are seemingly
nonexistent. Thus, the marketing of social responsibility is important for businesses
 that want to keep or attract consumers with mindsets toward the environment, social
issues and economic growth.
 Consumers expect it: Now more than ever, consumers (especially the millennial
generation) increasingly expect brands to not just have functional benefits, but a
social purpose, too. A Nielsen Global Survey on Corporate Social Responsibility
found that 50% of global consumers are even willing to pay more for socially
responsible products.
 It attracts and retains investors: As they’re helping fund companies, investors
naturally want to know that their money is being used properly. One study reports
that 83% of professional investors are more inclined to invest in stock of a company
well known for its social responsibility.
(b) Is it desirable for a society to have businesses that operate in a
socially responsible manner?

Yes because the most successful, respected, and desirable businesses exist to do
much more than make money; they exist to use the power of business to solve social
and environmental problems.

Study after study has shown that socially responsible businesses not only provide
sustainable business models, but also have improved marketing, employee recruitment,
employee satisfaction, legal treatment, customer loyalty, brand perception, and richer
partnerships.

(c) How could society get firms to operate in a socially responsible

Manner?

Society could get firm to operate in a socially responsible manner by Consumers,

Publicize their concern in the positive image they believe in that a company must be
socially conscious, we as Consumers are drawn to businesses that give back. A survey
conducted by Nielsen group, found that 50% of consumers, surveyed worldwide, would
be willing to pay more for goods and services from socially responsible companies.

How could firms that operate in a socially responsible manner get society to
support them over others that do not?

Consumers—especially those in North America—are likely to vote with their wallets

against companies whose social and environmental performance is poor. Forty-two
percent of North American consumers reported having punished socially irresponsible
companies by not buying their products.
Does globalization make firms anti-social?

Question: (a) There are several principal-agent relationships. State 5

common ones.

The five types of agents include: general agent, special agent, subagent, agency
coupled with an interest, and servant (or employee).

The general agent possesses the authority to carry out a broad range of transactions in

the name and on behalf of the principal. 

The special agent is one who has authority to act only in a specifically designated
instance or in a specifically designated set of transactions. For example, a real estate
broker is usually a special agent hired to find a buyer for the principal’s land.

An agent whose reimbursement depends on his continuing to have the authority to act
as an agent is said to have an agency coupled with an interest if he has a property
interest in the business.

To carry out her duties, an agent will often need to appoint her own agents. These
appointments may or may not be authorized by the principal. An insurance company, for
example, might name a general agent to open offices in cities throughout a certain
state. The agent will necessarily conduct her business through agents of her own
choosing. These agents are subagents of the principal if the general agent had the
express or implied authority of the principal to hire them.

The final category of agent is the servant. Any employee whose work duties were
subject to an employer’s control was called a servant. a servant as “an agent employed
by a master [employer] to perform service in his affairs whose physical conduct in the
performance of the service is controlled or is subject to the right to control by the
master.”

(b) Give five examples of principal-agent relationships in the

construction sector.
The Principal agent in a Construction industry means the person or entity appointed by
the client to manage or administer the services of all the other consultants during
a building project. He may be an architect, a quantity surveyor, an engineer or a project
manager.
principal-agent theory, asymmetric information, communication risk, risk
minimization, project management.
They agree that the main relationship in a construction project before the
contract is signed is that between the project owner and contractor. However,
they suggest that the main relationship after the contract is signed is that
between the project owner’s and contractor’s project managers, both of whom
are agents, which points to new and promising areas for further research.

the owner is particularly interested in the following: the end deliverable

will meet their functional requirements, the right project process is being
followed to successfully deliver the required end deliverables in the
optimum way, the project will meet the required quality, budget, and
schedule requirements, appropriate control mechanisms are in place to
achieve the above, the project manager is behaving in a professional and
trustworthy manner

(c) Explain the concept of “moral hazard” and give examples.

Moral hazard is a situation in which one party gets involved in a risky event knowing that
it is protected against the risk and the other party will incur the cost. ... This economic
concept is known as moral hazard. Example: You have not insured your house from any
future damages.

Moral hazard is a situation in which one party engages in risky behavior or fails to act in
good faith because it knows the other party bears the economic consequences of their
behavior. Any time two parties come into an agreement with one another, moral hazard
can occur.

Example of a moral hazard

A driver in possession of a car insurance policy may exercise less care while operating
their vehicle than an individual with no car insurance. The driver with a car insurance
policy knows that the insurance company will pay the majority of the resulting economic
costs if they have an accident. Any time an individual does not have to suffer the full
economic consequences of a risk, moral hazard can occur.

(d) Explain the concept of “adverse selection” and give examples.

Adverse selection in the insurance industry involves an applicant gaining insurance at a

cost that is below their true level of risk. A smoker getting insurance as a non-smoker is
an example of insurance adverse selection.
Adverse selection occurs when there is asymmetric (unequal) information between
buyers and sellers. This unequal information distorts the market and leads to market
failure.

Adverse selection occurs when someone makes a decision without all of the
information, which can result in an undesirable result. When one party has access to
better or more information than the other party during a transaction, it is said that one
has asymmetric information. Therefore, when a party has asymmetric information, they
may make an adverse selection.

For example, you are interested in buying a new car. While you think you have found
the one that fits you best, you are unaware, that the seller has some information about
problems with the car that he is not telling you. Because you are unaware of this
information, or asymmetric information, you decide to buy the car. What has just
happened is you were not aware of the true quality of the car you were buying, so
having asymmetric information, the seller was able to sell you a 'bad' product.

5. Question: (a) What is a balance sheet?

A balance sheet is a financial statement that reports a company's assets, liabilities and
shareholders' equity.

The balance sheet is one of the three (income statement and statement of cash flows
being the other two) core financial statements used to evaluate a business.

The balance sheet is a snapshot, representing the state of a company's finances (what
it owns and owes) as of the date of publication.
Describe the structure of the balance sheet.

According to the figures for P&L, total assets were $22M in 2003. That figure
increases to $24M in 2004. The balance sheet shows status of assets and
liabilities at a point. The structure of the assets and the structure of the
liabilities are constantly changing based on the various business transactions.

What is the purpose of the balance sheet?

The balance sheet provides a snapshot of a company's assets, liabilities, and equity at
the end of an accounting period. These three categories allow business owners and
investors to evaluate the overall health of the business, as well as its liquidity, or how
easily its assets can be turned into cash.

The purpose of the balance sheet is to reveal the financial status of a business as of a
specific point in time. The statement shows what an entity owns (assets) and how much
it owes (liabilities), as well as the amount invested in the business (equity). This
information is more valuable when the balance sheets for several consecutive periods
are grouped together, so that trends in the different line items can be viewed.

6. Question: (a) What is a net income statement?

The income statement summarizes a company's revenues and expenses over a period,
either quarterly or annually.

The income statement comes in two forms, multi-step and single step.

The multi-step income statement includes four measures of profitability: gross,

operating, pretax, and after tax.

The income statement measures profitability and not cash flow.

Net income is the positive result of a company's revenues and gains minus its expenses
and losses. A negative result is referred to as net loss. (There are a few gains and
losses which are not included in the calculation of net income. However, they are part of
comprehensive income).

(b) Describe the structure of the net income statement.

The net income statement shows that the profit for a period 2003 financial year
was $1M and $2M in 2004.
Revenues minus all expenses equals net income (profits or losses). Profits are also
referred to as net income or the “bottom line” because profits are reported at the bottom
of the income statement.

(c) What is the purpose of the net income statement?

The income statement, also known as a profit-and-loss statement, shows total

revenues and total expenses over a specific time period. Accountants typically
prepare income statements on a monthly, quarterly and annual basis.

The goal of a business is to make a profit. The income statement shows whether the
company is making a profit or not. It sums up all the company's revenues and
subtracts all of its expenses. Whatever is left is a profit or loss. Managers must know
how their business is performing and if it is profitable. If not, changes must be made,
or the company will go out of business. Managers use the income statement to
analyze the profit and expense performance of their businesses.

The purpose of the income statement is to provide the financial earnings performance of
the entity over a specific period of time. It is also referred to as a profit and loss
statement or earnings statement.