Guiding Questions:
- Generally individuals show a time preference for money? Give reasons.
- Why is the consideration of time important in financial decision making?
- Explain the mechanics of calculating the present value of cash flows.
- Explain the concept of valuation of securities.
- What is the difference between the valuation of bond and of a preference
share? - Why are dividends important in determining the present value of a share?
- What is the difference between the expected and the required rates of return in
context of common share? - What is capital budgeting? Why is it significant for a firm?
- What are the reasons for the popularity of the payback period method, despite
its weaknesses? - How do you calculate the ARR? What are its limitations?
- What is meant by the term value of money? Which capital budgeting methods
takes into consideration about this concept? How is it possible for the capital
budgeting methods that do not consider the time value of money to lead to
wrong capital budgeting decisions? - Distinguish between profits and cash flows? Why are cash flows important in
investment decisions? - What are incremental cash flows? Briefly explain effects of the following on
the calculation of incremental cash flows.
(a) Sunk costs.
(b) Allocation overheads and
(c) Opportunity costs. - How should depreciation be treated in capital budgeting? Do the depreciation
methods affect cash flows differently? How? - Explain the significance of cost of capital in financial decision making
- How is the cost of debt computed? How does it differ from the cost of
preference capital? - The equity capital is ‘cost free’. Do you agree? Give reasons
- How is the weighted average cost of capital calculated? What weights should
be used in its calculation? - The chairman of a rubber company stated “we don’t adjust our capital
budgeting calculations for inflation because the price and costs of the product
increase by the same rate” Comment - Explain the concept of risk? How can risk be measured?
- What is sensitivity analysis? What are its advantages and limitations?
- What is financial risk? How does it differ from business risk? How does the
use of financial leverage result in increased financial risk? - Explain the assumptions and implications of the net income approach and net
operating income approach. - Define capital structure. What do you mean by an appropriate capital
structure? What should generally be the features of an appropriate capital
structure?