B6005 Financial Management

Answer Key In-class Exercise 3 Bond Valuation

Discounted cash flows                                                                                         Answer: F

.         The market value of any real or financial asset, including stocks, bonds, or art work, may be found by determining future cash flows and then discounting them back to the present.

Call provision                                                                                                                  Answer: F 

.       A call provision... Continue reading "B6005 Financial Management" »

Principles of Economics

Scarcity and Economics

Scarcity refers to the limited nature of society's resources. Economics is the study of how society manages its scarce resources.

How People Make Decisions

1. People Face Tradeoffs

Every decision involves tradeoffs. A significant tradeoff society faces is between:

• Efficiency: When society gets the most from its scarce resources.
• Equality: When prosperity is distributed uniformly among society's members.

Tradeoff Example: To achieve greater equality, income could be redistributed from the wealthy to the poor. However, this can reduce the incentive to work and produce, shrinking the overall economy.

2. The Cost of Something Is What You Give Up to Get It

Decision-making requires comparing the costs and benefits... Continue reading "Principles of Economics: A Comprehensive Guide" »

Economic Planning in Developing Nations

What is the significance of economic planning for a developing country?

Barbara Wooton defines economic planning as "a system in which the market mechanism is deliberately manipulated with the object of producing a pattern other than that which would have resulted from its spontaneous activity."

Resource Use for National Benefit

Economic planning ensures optimal use of economic and human resources for national benefit. It increases output based on national priorities and reduces resource wastage.

Boosting Capital and Development

Capital formation is crucial in economic planning. Planned economies prioritize future growth over immediate needs, fostering rapid economic development.

Reducing Economic Inequality

Economic... Continue reading "Economic Planning: Vital for Developing Nations" »

Sole Proprietorship

A sole proprietorship is a business structure where an individual owns and operates the business. The owner contributes the capital, manages operations, and is solely responsible for the business's outcomes. They may work alone or employ others. This structure is the easiest to form and simplest to organize. The sole proprietor can borrow funds or utilize others' money for business purposes.

Advantages of Sole Proprietorship

Easy to Start

Forming a sole proprietorship is easier than partnerships or corporations. There are no legal formalities like agreements, memorandums of association, or articles of association.

Easy to Dissolve

Dissolving a sole proprietorship is simple, as the owner doesn't need permission from shareholders... Continue reading "Sole Proprietorship: Advantages, Disadvantages, and Characteristics" »

Study of Socioeconomic Problems and Needs: D: An analysis of socioeconomic needs is conducted to identify the issues that public funds should address.R: It is crucial to ensure that funds are allocated to areas that truly need them, aligning program objectives with the real needs of society.Issuance of Call for Proposals Terms and Conditions:D: Objectives, beneficiaries, eligible concepts, and deadlines of the call are defined.R: This stage ensures transparency and clarity in eligibility criteria and program objectives, facilitating the participation of companies and other interested parties.Publication of the Call:D: The call is made public so that interested parties can submit their applications.R: It is fundamental to ensure that all stakeholders... Continue reading "Public Funding Program Lifecycle: From Needs Analysis to Impact Assessment" »

Hedging with S&P 500 Index Futures

SIF hedging: NF = V_F(antiguo) = F_o x Z. NF (Number of contracts) = V_p (portfolio value) / (V_F x B_p) (Beta). With this hedge, risk is removed. If the index goes up, the profit in the portfolio will be offset by losses in SIFs contracts and vice versa.

Example: S&P 500 falls 5%:

• In the portfolio: R_p = B_p x (-5%) = -10% of a portfolio of $10M, resulting in $9M (Final Value).
• In the SIFS contracts: S_i = 980 (S&P 500 value given) x 0.95 (100% - 5%) = 931. F_i = 931 x (1 + 0.04 x 5/12 (next month timeframe)) = 946.52. V_F = NF x (F_i - F_o) x Z (250).
• Gain on futures: V_F(New) / Equity portfolio value.
• Outcome stock portfolio: 2 x (-5%) = -10%.
• Final Value portfolio: $10M - $1M + V_F(New).

Margin Payments

Margin payments... Continue reading "Hedging and Speculation with Futures and Options" »

Defining "Person"

A "person" can refer to various legal entities:

1. Individual: A natural human being.
2. Hindu Undivided Family (HUF): A family unit with common ancestors, treated as a single entity for tax purposes (India).
3. Company: A corporate entity registered under the Companies Act or similar law.
4. Firm: Partnership firms and limited liability partnerships (LLPs).
5. Association of Persons (AOP) or Body of Individuals (BOI): A group with a common purpose, with or without a formal partnership.
6. Local Authority: Municipal corporations, panchayats, and other local governance bodies.
7. Artificial Juridical Person: Entities like trusts, universities, or temples, recognized by law.

Defining "Assessee"

An "assessee" is a person liable to pay taxes:

1. Ordinary Assessee:

What is a Firm?

Let us now try to understand the meaning of a 'firm'. A firm is a focal point of the production system of any country. A firm produces goods with the help of its own resources. Sometimes these resources are borrowed from outside, and they are paid remuneration (price) for using them, for example, land, labor, capital, etc. A firm is an organizational unit, while a plant is a 'technical unit'. The objective of a firm in organizing such factors of production is to maximize profit. In other words, profit is the main objective of a firm. Any decision of a firm is taken in accordance with this objective.

Two Views of a Firm in Business Economics

In business economics, a firm is considered in two ways:

1. From the theoretical point of view.

Forward Exchange (EUR/SEK):

x = Exchange rate * (1 + SEK interest rate) / (1 + EUR interest rate).

CAP: Establishes an upper limit on interest rates. Floor: Establishes a lower limit on interest rates. EBITDA: Higher than net income. ROE: Return on Equity. For the equity the company provides, it generates an operating income of X annually.

Theoretical Semiannual Euribor:

(1 + First-half rate) * (1 + Second-half rate) = (1 + Annual rate).

Nominal Exchange Rate: (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level.

Spot Market: Notional amount * (1 / Current exchange rate - 1 / Initial exchange rate). Positive value means that in 9 months the spot market will be more expensive.

FXA (Foreign Exchange Agreement): Notional amount * (1... Continue reading "Understanding Forex, Financial Ratios, and Country Competitiveness" »

Representation of Preferences by Indifference Curves

An indifference curve shows the consumption baskets that yield the same level of satisfaction to the consumer. The consumer is indifferent between various combinations within the indifference curve. The slope at any point on an indifference curve is equal to the rate at which consumers are willing to substitute one good for another. This relationship is called the marginal rate of substitution (MRS). The rate at which a consumer is willing to trade Pepsi for pizza depends on who has more hunger or thirst, which depends in turn on how much pizza and Pepsi they have.

As a consumer prefers a larger quantity of goods, they prefer higher indifference curves to lower ones.

Four Properties of Indifference