ACC501 Mcqs FinalTerm

The document provided is a collection of multiple-choice questions (MCQs) for ACC501: Business Finance, specifically for final term preparation. These notes are aimed at helping students understand key concepts in corporate finance. Below is an overview of the main topics covered in the notes:

1. Dividend Models and Policies:

• Dividend Growth Model: The notes include questions related to models that estimate the value of stocks based on the future growth of dividends, such as the dividend growth model. It also touches upon dividend policies and their influence on stock valuation.
• Zero Growth Stock: Concepts related to zero-growth stocks, where dividends remain constant over time, are addressed. This type of stock is compared to perpetuity in terms of valuation.

2. Bonds and Securities:

• Bond Indenture and Valuation: A number of questions focus on bond indentures, which are contracts outlining the key terms of a bond issue. The valuation of bonds is discussed, including how the present value is calculated based on coupon rates and market-required rates of return.
• Yield Concepts: Various yields are covered, such as Yield to Maturity (YTM), Current Yield, and Capital Gains Yield, which are important for understanding bond investments. Questions also focus on how bond prices fluctuate due to changes in interest rates, inflation, and market conditions.
• Types of Securities: The distinction between equity securities (like shares) and debt securities (like bonds and debentures) is explored, including the rights associated with each (e.g., voting rights for shareholders).

3. Risk and Return:

• Default Risk Premium: This section covers how investors demand higher yields for bonds with greater risk, and the concept of the default risk premium as compensation for the risk of possible default.
• Interest Rate and Inflation Risks: Several questions address the impact of inflation and interest rate changes on bond and stock values, as well as real vs. nominal returns.

4. Capital Budgeting and NPV:

• Net Present Value (NPV): The notes include questions related to capital budgeting decisions, focusing on NPV as a key criterion for evaluating investment projects. If the NPV is greater than zero, the project is considered acceptable.
• Internal Rate of Return (IRR): This is another critical concept in capital budgeting covered in the notes, highlighting its use in determining the profitability of potential investments.

5. Debt and Equity Financing:

• Debt vs. Equity: There are questions about the characteristics of debt and equity financing, focusing on how debt does not provide ownership interest but does have implications like potential bankruptcy risk for unpaid debt.
• Tax Deductibility of Interest: The tax advantages of debt financing, particularly the deductibility of interest payments on debt, are discussed.

6. Financial Markets and Intermediaries:

• Role of Brokers: The document touches upon the role of brokers in financial markets, explaining how brokers facilitate buying and selling securities but do not hold securities in inventory themselves.
• Credit Rating Agencies: The function of credit rating agencies, including PACRA (Pakistan Credit Rating Agency), is explained. These agencies assess the creditworthiness of entities issuing bonds and other securities.

7. Stock Valuation and Market Efficiency:

• Stock Valuation Models: The dividend discount model (DDM) is explored, which is used to estimate the value of a company’s stock based on predicted future dividends.
• Efficient Market Hypothesis: Though not covered in depth, there are questions that hint at the importance of understanding how market efficiency affects the pricing of securities.

8. Corporate Actions and Governance:

• Call Provisions and Protective Covenants: Some questions focus on bond-related provisions like call provisions, which allow companies to repurchase bonds before maturity. Protective covenants are also discussed, which are designed to protect bondholders from risks associated with the issuer’s actions.

9. Other Key Financial Concepts:

• Inflation and Real Returns: Questions cover the difference between nominal and real returns, focusing on how inflation impacts the purchasing power of returns on investment.
• Tax Implications: The document addresses how different financial instruments and income sources are taxed, particularly focusing on debt securities and how interest payments are treated as tax-deductible expenses.

These notes offer a comprehensive set of questions and answers that cover a wide range of key topics in business finance, making them a useful resource for students preparing for their final exams in ACC501. The questions are designed to test the understanding of fundamental concepts in financial management, investment analysis, corporate finance, and financial markets.