Answer 1

A Two of the most important limitations of the proprietorship form of business are:
1. There is difficulty in raising capital after a certain limit
2. The presence of unlimited personal liability for company debts
B It is important for a financial manager to be able to forecast and plan because one needs to have
visibility of the earnings the company is going to make and also forecasts the changing environment
so that can produce the products as per the client requirement and needs. Also, only forecasting
shall not help, as he should be able to plan well in advance as how to achieve the targeted goal. Well
planning is half job done. Going further, coordination is necessary among the departments and
control in the expenditure in order to generate the maximum profits.
C Wealth maximization is a better than simple profit maximization as profit maximization is a short
term goal while wealth maximization a long term one. This term is used for long-term investors.
While short-term investors work for profit maximization.
D Agency costs are a type of internal cost itself. They arise from an agent acting on behalf of a
principal. The core reason is because of issues such as conflicts of interest between shareholders and
management. In this case, the shareholders wish the management to run company in a way which
shall benefit the shareholders maximum by increasing shareholder value. On the other hand,
management may have other aims such as growing the company in such ways which shall maximize
their personal wealth (though it may not be in the best interest of shareholders).

Answer 2
A A Security market line (SML) is a graph that results from the capital asset pricing model. It is a
line that shows the systematic/market risk versus return of the whole market at a particular time.
This also shows all the risky marketable securities. Underpriced securities would be plotted above
the SML and overpriced would be plotted below the SML.
B Capital asset pricing model (CAPM) shows the relationship between the risk and the return. As
per the CAPM the expected risk premium on a security varies in direct proportion to beta. It is
expressed as: (r - rf) = B (rm - rf).
Where:
(r - rf) = expected risk premium on any security,
(rm - rf) = market risk premium and
B = security risk.
We can calculate the return as = Rf + B(rm-rf)
C Diversification is a technique which reduces risk. This is done by allocating the
portfolio/individual investments among different financial instruments, sectors or categories. As the
portfolio is diversified so the risk from any particular investment failure on the performance of
overall portfolio performance is less.
Now risk can be bifurcated into two. One if diversifiable and the other is non-diversifiable. The non-
diversifiable risk is also called as beta. This is the systematic risk or the market risk which is not in the
hands of the company and cannot be diversified, no matter how much the company tried internally.
As a result, beta plays a crucial role in the risk element of a company.
D The three forms of the market efficiency are as follows:
(1) Weak Efficiency: This type of market efficiency means that the price of the securities fully
reflects price and trading history.
(2) Semi Strong Efficiency: As per the Semi Strong Efficiency the price of securities fully reflects all
public information, including historical price and trading patterns.
(3) Strong Efficiency: This means that all kind of information, whether public or private, is accounted
for in the share price - means prices of securities reflect all information regardless of whether or not
it is publicly available. Nothing can generate an investor advantage to anyone.