Q1.
Liquidity Preference- the premium that wealth holders demand for exchanging
ready money or bank deposits for safe, non-liquid assets such as government
bonds. It suggests that investors demand progressively higher premiums on medium
and long-term securities as opposed to short-term securities.
For instance, in case of a fixed deposit, banks offer interest rates depending upon
the term of the contract. If investors are willing to sacrifice liquidity for a longer time,
they demand to be compensated in terms of higher interest.
Q2. Yes, I think that getting listed on the stock exchange will affect the dividend
policy.
Since the company will be selling its shares to raise capital, the dividends will no
longer be paid to the customers and would rather be paid to the shareholders.
Previously, the dividends were being paid to the customers who opted to invest in
the company. But in the event of being listed, the company will start receiving direct
investments.
Q3. Factors that affect the dividend policy-
● Type of industry- Industries, where earnings are stable, may adopt a
consistent dividend policy as opposed to the industries where earnings are
uncertain and uneven.
● Age of a company- New companies will have a tendency to use profits for
growth and expansion unlike Old and stable companies that mostly have a
well defined dividend policy.
● Profitability- The more profits a company makes, the higher the dividends
will it pay to its shareholders.
● Inflation
● Changes in Govt. policies
Q4. Major Business Entities-
● Sole Proprietorship
● Partnership Firm
● Limited Company
● Limited liability partnership
TYPE Sole Partnership Limited LLP
Proprietorship Firm company
Ownership Single owner Two or more Maximum of Two or more
50
shareholders
Liability Unlimited Unlimited Limited Limited
Liability Liability Liability Liability
Legal Not a legal Not a legal Separate Separate
Status entity Entity legal entity legal entity
Q5. I think the individual should go for a limited company with the help of his friends.
Because, limited companies stand to be more tax efficient than sole traders, as
rather than paying Income Tax they pay Corporation Tax on their profits. As things
stand this offers a kinder tax rate, meaning forming a limited company can be more
profitable. In addition to this, there’s a wider range of allowances and tax-deductible
costs that a limited company can claim against its profits.
Q6. The Modigliani-Miller theorem (M&M) states that the market value of a company
is correctly calculated as the present value of its future earnings and its underlying
assets, and is independent of its capital structure.
The Modigliani-Miller theorem argues that the option or combination of options
that a company chooses has no effect on its real market value.
Q7.
1. Working Capital- Working capital means the capital invested in the
current assets of the company. It consists of short term assets and
liabilities and is highly liquid.
2. Fixed Capital- Fixed capital refers to the investment of the enterprise in
long term assets of the company. It consists of Durable goods whose
useful life is more than one accounting period and are comparatively
less liquid than working capital.
Q8. Economies of Scale refer to the cost advantage experienced by a firm when it
increases its level of output. The advantage arises due to the inverse relationship
between per-unit fixed cost and the quantity produced. The greater the quantity of
output produced, the lower the per-unit fixed cost. Economies of scale also result in
a fall in average variable costs with an increase in output. This is brought about by
operational efficiencies and synergies as a result of an increase in the scale of
production.
Q9.Quality of narrative information in annual reports is unlikely to be augmented by
guidelines which encourage the discussion of corporate performance through the
eyes of management. Since the annual report and letter to shareholders are highly
scru-tinized public disclosures, it is often argued that impressions are relevant in
achieving management’s goals, such as safeguarding their image and employment.
A positive report that showcases profits and growth will also attract investors and will
better the reputation of the corporation as an investment option.
Q10. The first scenario can be looked at as an investment. The 2000 rupees lost can
be seen as a lump sum amount paid for future returns. Even if the term of the
investment is very small, the investor should be rewarded at least some profit. On
return of the same amount the next day, the time value of money may have changed
and may cause a possible loss. So the smart thing to do is to opt for option 2.
Q11. There are certain factors that need to be considered in order to determine the
cost of holding a buffer. These factors are-
● Location and topography of the area
○ Taking New Delhi for example will cost around 50k to 50lakhs
for a basic Godown/Warehouse.
● Perishable/ Non Perishable goods-
○ Perishable goods like fruits, vegetables, grains etc will require a
cold storage or an appropriate environment.
● Personnel (Security, Maintenance and Forklift operators)
● Transportation.
● Machinery Costs.
