CB1 Business Finance

HOW FUTURES ARE DIFFERENT FROM FORWARDS?

A forward is an agreement between two parties to trade a specified asset at a set date in the future at a set price whereas futures are standardised and exchange-tradeable.

 

WHAT ARE DERIVATIVES?

A derivative is a financial instrument that derives its value from the value of some other asset. Some types of derivatives are swaps, options, futures and forwards.

 

STATE THE RELATION BETWEEN EPS AND DPS?

Dividend per share is the actual EPS that is paid out to the shareholders in the form of dividends.

 

HOW CROWDFUNDING TAKES PLACE?

Crowdfunding is the way through which a large number of participants, individuals or businesses, support a business, project, campaign or an individual by often building a crowdfunding website which will typically charge a fee, eg a percentage of the money raised.

 

WHAT DO YOU UNDERSTAND BY DOUBLE TAXATION RELIEF? WHEN DOES IT OCCUR?

Double taxation relief (DTR) means that the local tax authority allows companies with overseas income or capital gains to offset tax paid overseas against their liability to domestic tax on that income or capital gains. 

 

WHAT IS NIL PAID RIGHTS?

In case of rights issue, when the shareholders acquire these shares without paying immediately, such issue is known as nil-paid rights.

 

WHAT IS THE USE OF DELPHI TECHNIQUE?

The Delphi technique involves gathering the thoughts of a number of experts in a particular area where the organiser sends questions to experts and maintains the anonymity of the answers to finally reach a common conclusion. 

 

WHAT IS MEANT BY GEARED BETA?

The beta of a company’s shares is affected by the company’s existing gearing. If the gearing were to change, then the volatility of returns would change, and hence the beta would change.

 

WHAT ARE THE MAIN DECISIONS TAKEN BY A FINANCIAL MANAGER?

A company’s financial managers are responsible for the major investment and financing decisions. 

 

WHY CAPITAL BUDGETING IS IMPORTANT?

The capital budgeting decision considers the choice of projects, and hence real assets, in which the firms should invest. Thus, it helps in deciding the profitable project amongst the alternatives.

 

STATE SOME CONFLICTING OBJECTIVES OF DIFFERENT STAKEHOLDERS.

The scope for conflict between owners and managers may arise when some managers might wish to pursue projects of interest over more profitable projects but shareholders’ objective will normally be to receive a high return on their investment in the company. Also there may be  differences between the lenders’ short-term desire for security and the shareholders’ long-term interest in the development of the company. 

 

WHAT IS AGENCY PROBLEM?

The managers of a company may have aims which are not in the best interests of the shareholders, this is known as the ‘agency problem’. For example, some managers might wish to pursue projects of interest over more profitable projects but shareholders’ objective will normally be to receive a high return on their investment in the company. 

 

WHAT DO YOU UNDERSTAND BY OPPORTUNITY COST OF CAPITAL?

It is the cost of the next best alternative foregone. Since firms have limited cash, they may wish to invest in one project by sacrificing to invest in some other project. The cash flows arising from the foregone project is then the opportunity cost of capital for the existing project.

 

WHAT IS CAPITAL GAINS TAX? 

Capital gains tax is the difference between the sale price and purchase price of a real asset when the former is greater.

 

WHAT IS OFFER FOR SALE?

In an offer for sale at a fixed price, a predetermined number of shares is offered to the general public at a specified price.  

 

WHAT IS THE MAIN DIFFERENCE BETWEEN HIRE PURCHASE AND LEASE?

A hire purchase agreement is an agreement to pay regular rental payments for the goods you hire and then to buy them at the end of the agreed period. Legal ownership passes to the buyer only when the final payment is made. A lease is an agreement where the owner of an asset gives the lessee the right to use the asset over a period of time, in return for a regular series of payments. Legal ownership does not change hands. 

 

WHEN ARE DERIVATIVES MOST USEFUL?

The uses of derivatives vary widely: risk management, e.g. of interest rates, exchange rates, stock market indices or prices along with borrowing cost reduction. 

 

WHAT ARE THE THREE SECTIONS OF CASH FLOW STATEMENT?

Cash flow from operating activities, cash flows from investing activities and cash flow from financing activities.

 

WHAT IS WORKING CAPITAL? HOW IS IT CALCULATED?

Working capital is the amount that the business has in cash or near-cash having deducted the claims on that cash in the form of current liabilities. It is calculated as the difference between current assets and current liabilities.

 

DIFFERENCE BETWEEN A FORECAST AND A BUDGET?

Forecasts are predictions of future events in a passive manner. In contrast, budgets are active. They are plans, expressed in monetary terms, for the future.

 

HOW IS DIVIDEND POLICY OF A COMPANY DECIDED?

Key factors in the dividend decision are stock market reaction eg adverse reaction to dividend cuts, competitors’ policies cash reserves, tax – investors prefer dividends if they are taxed at a higher rate on capital gains, growth opportunities – if these exist it may be better to retain profits stability and consistency with previous dividend policy and  investor preferences- eg need for cash, better opportunities to invest elsewhere. 

 

HOW PRECISION AND ACCURACY ARE DIFFERENT?

Accuracy measures how close the result is to the actual value required whereas precision measures how close results are to one another. While accuracy can be used in one instance, precision will be measured over time.

 

HOW DATA IS DIVIDED INTO TRAINING AND TEST DATA? WHY IS IT NECESSARY?

In machine learning, the ‘training’ data is often split into a part used to estimate the parameters of the model, and a part used to validate the model. Also, a test data set is created where the sample of data used to provide an unbiased evaluation of the final model fit.

 

WHY GENERALISED LINEAR MODELS IMPORTANT IN PRICING INSURANCE PRODUCTS? 

 

WHAT IS OVER AND UNDER GRADUATION?

If the graduation process results in rates that are smooth but show little adherence to the data, then we say that the rates are over graduated. However if they adhere to the data but progress erratically, then they seem to be under-graduated.

 

HOW IS GINI INDEX A USEFUL TOOL IN MACHINE LEARNING?

Gini index measures the purity of the decision tree in such a way that it depicts an indication of how ‘pure’ the leaf nodes are. For each node, Gini index is weighted by the total number of instances in the parent node.