Question: What is Option?
Answer:
Ø Option is a derivative
security because value is derived from the value of another security.
Ø The right to buy or sell a
firm’s common stock at a specified price for a stated period of time
Question: What is Call Option?
Answer:
A call option gives the buyer the right but not
obligation to call the underlying instrument for delivery at a specified price
(exercise price) & obligation to seller to sell the underlying instrument
at the same price.
Question: What is Financial Leverage? Implications of Financial Leverage
Answer:
Ø Financial leverage involves
changes in shareholders' income in response to changes in operating profits,
resulting from financing a company's assets with debt or preferred stock
Ø Financial leverage is
concerned with the relationship between operating profits and earnings per
share.
Question: What is operating
leverage?
Answer:
Ø Operating leverage is a
measure of how sensitive net income is to percentage changes in sales.
Ø Operating leverage acts as a
multiplier. If operating leverage is high, a small percentage increase in sales
can produce a much larger percentage increase in net income.
Question: What is degree of
operating leverage?
Answer:
The
degree of operating leverage may be defined as
the percentage change in operating profit resulting from a percentage changes in sales.
Question: What is Put option?
Answer:
A put option gives the buyer the right but not
obligation to put the underlying instrument for delivery at a specified price
(exercise price) & obligation to seller to buy the underlying instrument at
the same price.
Question: What is Future Contract?
Answer:
A commitment today to transact in the future, both
parties have agreed to a deferred delivery at sales price that is currently
determined with no funds having been exchanged.
Question: What is Zero Coupon Bond ?
Answer:
A zero-coupon bond is a bond
bought at a price lower than its face value,
with the face value repaid at the time of maturity. It does not make periodic interest
payments, or have so-called "coupons,".
Question: What
are the underlying assumption of Cost-Volume-Profit Analysis?
Answer:
CVP assumes the following:
- Constant sales price;
- Constant variable cost per unit;
- Constant total fixed cost;
- Constant sales mix;
- Units sold equal units produced.
Question: What is cost of
capital?
Answer:
Ø The cost of capital is the
discount rate used for evaluating the desirability of the investment project.
Ø It is also know as the
cutoff, or the target, or the hurdle rate. It is the minimum required rate of
return on the investment project that keeps the present wealth of shareholders
unchanged
Question: What is weighted average cost of capital?
Answer:
The
composite, or overall cost of capital is the weighted average of the cost of
various sources of fund , weights being the proportion of each source of funds
in the capital structure
Question: What are the Different Method of Project
Evaluation?
Answer:
1) Traditional
Methods
a) Pay Back Period Method
b) Accounting Rate of Return
2) Discounted
Cash Flow Method
a) Net Present Value Method
b) Internal Rate of Return Method
c) Profitability Index Method
Question: What
is Pay Back period in Finance?
Answer:
Payback
period in business and economics refers to the period of time required for the
return on an investment to "repay" the sum of the original investment
Question: What are the
limitations of Pay back Period Method in evaluation of
Project ?
Answer:
1)
The payback period only considers revenue, does not consider profits.
2) It ignores any benefits that occur after the
payback period. It does not measure total income.
3) It ignores the time value of money.
4)
It is dependent on cash inflows which are hard to predict.
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