IF_L1

Question 1

Real Assets

Answer 1

• Physical or intangible resources used to produce goods and services
• Have intrinsic value in production (e.g. factories, land, workforce)

Question 2

Financial Assets

Answer 2

• Claims on income generated by real assets
• Examples: shares, bonds, bank deposits

Question 3

Corporate Investment Decisions

Answer 3

• Also called capital budgeting or CAPEX decisions
• Focus on which real assets to acquire for future growth and profit

Question 4

Corporate Financing Decisions

Answer 4

• Concern how to fund chosen investments (mix of debt and equity)
• Also called capital structure decisions

Question 5

Opportunity Cost of Capital

Answer 5

• The minimum acceptable return on a project of given risk
• Investing in a project foregoes other potential investments
• Also called the hurdle rate or required return

Question 6

Net Present Value (NPV)

Answer 6

• NPV = sum of discounted future cash flows minus initial investment
• Accept projects with positive NPV, as they increase shareholder wealth

Question 7

Present Value

Answer 7

• PV of a future cash flow: (C_t / (1 + r)^t)
• Reflects the value today of money received in the future

Question 8

Perpetuity

Answer 8

• A constant cash flow received forever
• PV of perpetuity = C / r (no growth)

Question 9

Growing Perpetuity

Answer 9

• A perpetual stream of cash flows increasing by a constant rate g
• PV = C₁ / (r − g)

Question 10

Annuity

Answer 10

• A series of equal payments for a fixed number of periods
• Common in loan repayments and lease agreements

Question 11

Agency Problem

Answer 11

• Conflict between managers (agents) and shareholders (principals)
• Managers may prioritise personal benefits over shareholder wealth

Question 12

Separation of Ownership

Answer 12

• In large corporations, owners (shareholders) differ from managers
• Allows investors to diversify easily but can create agency issues

Question 13

Financial Goal of the Corporation

Answer 13

• To maximise shareholder wealth (often reflected by share price)
• Must also consider stakeholders and societal impact

Question 14

Rate of Return Rule

Answer 14

• Accept projects if expected return exceeds the opportunity cost of capital
• Similar to NPV rule but framed as a percentage return measure