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Fin101- Essay Question Made by @SEU05
Page
1
1- Differentiate between Primary Market and Secondary Market.
- Primary Market:
Investors buy securities directly from the company issuing
them.
- Secondary Market:
Investors buy and sell previously issued securities among
themselves.
2- What is the difference between Preferred Stock and Common
Stock?
- Preferred Stock:
➢ Represent ownership in corporation.
➢ Does not have the right to vote.
➢ Declared by the board of director.
- Common Stock:
➢ Is the basic ownership claim in a corporation.
➢ Has the right to vote.
➢ Stockholders enjoys limited liability.
3- Define each of the following terms: strong-form efficiency  semi
strong-form efficiency  weak form efficiency brokers dealers.
Strong-form efficiency:
- Strong-form market efficiency states that the price of a
security in the market reflects all information-public as well
as private or inside information.
- Semi strong-form efficiency:
- Semi strong-form market efficiency implies that only public
information that is available to all investors is reflected in a
security’s market price.
- Weak form efficiency:
Fin101- Essay Question Made by @SEU05
Page
2
- In weak-form market efficiency, all information contained in
past prices of a security is reflected in current prices.
- Brokers:
- A broker brings a seller and a buyer together but does not
buy or sell in the transaction broker does not take on risk.
- Dealers:
- A dealer participates in trades as a buyer or seller using her
own inventory of securities dealer takes on risk.
4- Briefly explain the difference between independent projects and
mutually exclusive projects and contingent projects?
- Independent Project:
➢ Are project that the decision to accept or reject
doesn’t affect to the acceptance or rejection for
another project.
- Mutually Project:
➢ Are project that the decision to accept or reject
directly it will affect to the acceptance or rejection for
another project.
- Contingent Project:
➢ Are project that the decision to accept one project
depends on acceptance of another project.
5- What are the types of Contingent Project?
➢ Mandatory Projects
➢ Optional Projects
6- Explain the Five-Step approach for calculating NPV.
i. Estimate Project Cost
➢ Identify and add the present value of expenses related
to the project.
ii. Estimate Project Net Cash Flows
Fin101- Essay Question Made by @SEU05
Page
3
➢ Both cash inflows (CIF) and cash outflows (COF) are
likely in each year of the project.
iii. Determine Project Risk and Estimate Cost of Capital
➢ The cost of capital is the discount rate used to
determine the present value of expected net cash
flows.
➢ The riskier a project, the higher its cost of capital.
iv. Compute the Project’s NPV
➢ Determine the difference between the present values
of the expected net cash flows from the project and
the expected cost of the project.
v. Make a Decision
➢ Accept a project if it has a positive NPV, reject it if the
NPV is negative.
7- What Does mean by Free Cash Flow (FCF)?
- Free cash flow is cash remaining after a firm has made
necessary project-related expenditures for working capital
and long-term assets.
8- What are the Projects-Related Expenditures? and give me some
of examples of them.
- Working Capital
➢ Inventory
➢ Account Receivable
- Long-term Assets
➢ Equipment
➢ Plant
Fin101- Essay Question Made by @SEU05
Page
4

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Fin04

  • 1. Fin101- Essay Question Made by @SEU05 Page 1 1- Differentiate between Primary Market and Secondary Market. - Primary Market: Investors buy securities directly from the company issuing them. - Secondary Market: Investors buy and sell previously issued securities among themselves. 2- What is the difference between Preferred Stock and Common Stock? - Preferred Stock: ➢ Represent ownership in corporation. ➢ Does not have the right to vote. ➢ Declared by the board of director. - Common Stock: ➢ Is the basic ownership claim in a corporation. ➢ Has the right to vote. ➢ Stockholders enjoys limited liability. 3- Define each of the following terms: strong-form efficiency semi strong-form efficiency weak form efficiency brokers dealers. Strong-form efficiency: - Strong-form market efficiency states that the price of a security in the market reflects all information-public as well as private or inside information. - Semi strong-form efficiency: - Semi strong-form market efficiency implies that only public information that is available to all investors is reflected in a security’s market price. - Weak form efficiency:
  • 2. Fin101- Essay Question Made by @SEU05 Page 2 - In weak-form market efficiency, all information contained in past prices of a security is reflected in current prices. - Brokers: - A broker brings a seller and a buyer together but does not buy or sell in the transaction broker does not take on risk. - Dealers: - A dealer participates in trades as a buyer or seller using her own inventory of securities dealer takes on risk. 4- Briefly explain the difference between independent projects and mutually exclusive projects and contingent projects? - Independent Project: ➢ Are project that the decision to accept or reject doesn’t affect to the acceptance or rejection for another project. - Mutually Project: ➢ Are project that the decision to accept or reject directly it will affect to the acceptance or rejection for another project. - Contingent Project: ➢ Are project that the decision to accept one project depends on acceptance of another project. 5- What are the types of Contingent Project? ➢ Mandatory Projects ➢ Optional Projects 6- Explain the Five-Step approach for calculating NPV. i. Estimate Project Cost ➢ Identify and add the present value of expenses related to the project. ii. Estimate Project Net Cash Flows
  • 3. Fin101- Essay Question Made by @SEU05 Page 3 ➢ Both cash inflows (CIF) and cash outflows (COF) are likely in each year of the project. iii. Determine Project Risk and Estimate Cost of Capital ➢ The cost of capital is the discount rate used to determine the present value of expected net cash flows. ➢ The riskier a project, the higher its cost of capital. iv. Compute the Project’s NPV ➢ Determine the difference between the present values of the expected net cash flows from the project and the expected cost of the project. v. Make a Decision ➢ Accept a project if it has a positive NPV, reject it if the NPV is negative. 7- What Does mean by Free Cash Flow (FCF)? - Free cash flow is cash remaining after a firm has made necessary project-related expenditures for working capital and long-term assets. 8- What are the Projects-Related Expenditures? and give me some of examples of them. - Working Capital ➢ Inventory ➢ Account Receivable - Long-term Assets ➢ Equipment ➢ Plant
  • 4. Fin101- Essay Question Made by @SEU05 Page 4