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FPT3701 ASSIGNMENT 2 EXAM QUESTIONS AND ANSWERS 2024
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FPT3701 ASSIGNMENT 2 EXAM QUESTIONS AND ANSWERS 20241. Question: What is the purpose of financial planning?
Answer: Financial planning involves creating a comprehensive strategy to manage an individual's or organization's finances to achieve long-term goals. Its purpose is to ensure that resources are allocated efficiently, risks are managed, and financial objectives are met.
2. Question: Explain the difference between financial forecasting and financial budgeting.
Answer:
●Financial Forecasting is the process of estimating future financial outcomes based on historical data and assumptions about future conditions. It helps predict future revenues, expenses, and other financial metrics.
●Financial Budgeting involves creating a detailed plan for how an organization or individual intends to allocate their resources over a specific period. It includes setting financial goals and establishing benchmarks for performance.
3. Question: What is the time value of money (TVM), and why is it important
in financial planning?
Answer: The Time Value of Money (TVM) is a financial principle that states that a dollar today is worth more than a dollar in the future due to its potential earning capacity. TVM is important in
financial planning because it helps in evaluating investment opportunities, calculating present and future values, and making informed financial decisions.
4. Question: What are the primary components of a financial statement?
Answer: The primary components of financial statements are:
●Income Statement: Shows revenues, expenses, and profits over a period.
●Balance Sheet: Displays assets, liabilities, and equity at a specific point in time.
●Cash Flow Statement: Reports cash inflows and outflows from operating, investing, and financing activities.
●Statement of Changes in Equity: Details changes in equity over a period.
5. Question: Define risk management and its importance in financial planning.
Answer: Risk management is the process of identifying, assessing, and prioritizing risks, and implementing strategies to mitigate or manage those risks. In financial planning, risk management is crucial for protecting assets, ensuring financial stability, and achieving long-term
financial goals.
6. Question: What is the difference between fixed and variable costs? Answer:
●Fixed Costs: These are expenses that remain constant regardless of the level of production or sales volume, such as rent and salaries.
●Variable Costs: These expenses fluctuate with the level of production or sales volume, such as raw materials and commissions.
7. Question: Explain the concept of diversification in investment portfolios.
Answer: Diversification is an investment strategy that involves spreading investments across various asset classes, sectors, or geographic regions to reduce risk. By not putting all eggs in one basket, investors can mitigate the impact of poor performance in any single investment on the overall portfolio.
8. Question: What is the role of interest rates in financial decision-making?
Answer: Interest rates influence the cost of borrowing and the return on investments. In financial decision-making, interest rates impact the attractiveness of investments, the cost of loans, and overall financial strategies. Higher interest rates generally increase borrowing costs but can enhance investment returns, while lower rates reduce borrowing costs but may lower investment yields.
9. Question: Describe the concept of leverage in finance.
Answer: Leverage involves using borrowed funds to increase the potential return on an investment. It amplifies both gains and losses, as investors use debt to finance larger investments than they could with their own capital alone. While leverage can enhance returns, it
also increases financial risk.
10. Question: What is a capital budgeting decision, and what are some common methods used?
Answer: Capital budgeting decisions involve evaluating and selecting long-term investments that are expected to generate future cash flows. Common methods used include:
●Net Present Value (NPV): Calculates the difference between the present value of cash inflows and outflows.
●Internal Rate of Return (IRR): Determines the discount rate at which the net present value of cash flows equals zero.
●Payback Period: Measures the time required to recover the initial investment.
●Profitability Index (PI): Assesses the ratio of the present value of cash inflows to the initial investment.
Feel free to ask if you need more specific questions or if there are particular topics you want to focus on!
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11. Question: What is the purpose of a cash flow statement?
Answer: The purpose of a cash flow statement is to provide information about the cash inflows and outflows of an organization during a specific period. It helps in assessing the liquidity, solvency, and financial flexibility by showing how cash is generated and used in operating, investing, and financing activities.
12. Question: Describe the concept of the weighted average cost of capital (WACC).
Answer: The Weighted Average Cost of Capital (WACC) represents a company's average after-tax cost of capital from all sources, including debt, equity, and preferred stock. It is calculated by weighting the cost of each component by its proportion in the company's capital structure. WACC is used in financial modeling to discount future cash flows and evaluate investment opportunities.
13. Question: What is the difference between a primary market and a secondary market?
Answer:
●Primary Market: This is where new securities are issued and sold to investors for the first time, such as through an initial public offering (IPO).
●Secondary Market: This is where existing securities are traded among investors after the initial issuance, such as on stock exchanges like the NYSE or NASDAQ.
14. Question: Explain the concept of compound interest and its impact on investment growth.
Answer: Compound interest is the process of earning interest on both the initial principal and the accumulated interest from previous periods. It accelerates the growth of investments over time compared to simple interest, where interest is only earned on the principal amount. Compound interest can significantly increase the value of investments, especially over long periods.
15. Question: What is a financial ratio, and why are ratios important in financial analysis?
Answer: A financial ratio is a mathematical relationship between two financial figures, derived from financial statements. Ratios are important in financial analysis because they provide insights into a company's performance, financial health, and operational efficiency. Common ratios include liquidity ratios, profitability ratios, and leverage ratios.
16. Question: Define the term 'market capitalization' and how it is calculated.
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