Addresses the following learning outcomes: 1. Apply basic financial theories and understand the operations of financial markets; 2. Apply the portfolio theory to construct a diversified portfolio; 3. Determine the corporate cost of capital

Question 1 i) Describe the three basic forms of business organization and discuss their advantages and disadvantages. ii) Define what is meant by an agency relationship and clearly explain what an agency problem is. Use a real life example to demonstrate your understanding. iii) Name three investment rules. Detail the mechanics for each of these rules and compare their advantages and disadvantages. Finally, tell us which rule you personally prefer and why.

Question 2 i) Given a simple world with two assets, a bond fund and a stock fund, clearly detail the steps involved in arriving at the 1) efficient frontier, and 2) market (optimal) portfolio. ii) What is the significance of the Capital Market Line? To be more specific, what relationship does this line depict? Give a brief discussion on its application. iii) One important assumption behind portfolio theory is that investors are meanvariance maximizers. What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier.

Question 3 Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?