Unit 0

Question 1

Financial policy

Answer 1

Deciding the use of inflows and the source of cash outflows

Question 2

Financial structure

Answer 2

How cash flows and control rights are allocated over time to the various investors

Question 3

Sources and uses of funds equality

Answer 3

.

Question 4

Fisher separation theorem

Answer 4

Under PCM (or CM) investment decisions can be separated from individual consumption decisions

=> an investment’s NPV provides the right comparison between investment and the financial market

=> investment decision is independent of preferences and endowments

Question 5

Perfect capital markets require

Answer 5

• No borrowing contraints
  
  • Only contraint imposed is on terminal wealth
• No transaction costs
  
  • Borrowing and lending are done at the same interest rate.

Question 6

Complete markets

Answer 6

There must be enough securities to allow investors to achieve arbitrary state-contingent consumption plans