Que 1. Which of the following refers to planning and deployment of available capital for the purpose of maximizing long-term profitability of the firm. (A) Risky Investment (B) Risk-free Rate (C) Capital Budgeting (D) Capital Rationing

Que 2. Which of the following refers to the variability that is likely to occur between the estimated returns and the actual returns. (A) Risky Investment (B) Risk-free Rate (C) Capital Budgeting (D) Capital Rationing?

Question

Answer

Answer:

Que 1: Capital Budgeting

Explanation: Capital Budgeting is the process of planning and deploying available capital for the purpose of maximizing long-term profitability of the firm. It involves identifying and evaluating potential investment opportunities and deciding which projects to undertake based on their expected returns and risk levels. This process helps the firm to allocate its financial resources in the most efficient manner and achieve its long-term financial goals.

Que 2: Risk

Explanation: Risk refers to the variability that is likely to occur between the estimated returns and the actual returns. It is an inherent part of any investment and arises due to various factors such as market conditions, economic trends, political instability, and company-specific factors. The level of risk associated with an investment depends on various factors such as the nature of the investment, the size of the investment, the expected returns, and the time horizon of the investment.

Types of Risk:
There are different types of risk that investors and firms need to consider while making investment decisions. Some of the common types of risks are:

1. Market Risk: Market risk refers to the risk that arises due to changes in market conditions such as interest rates, inflation, and exchange rates. This type of risk affects all investments and cannot be diversified away.

2. Credit Risk: Credit risk refers to the risk that arises due to the possibility of default by the borrower. It is more applicable in case of debt investments such as bonds.

3. Liquidity Risk: Liquidity risk refers to the risk that arises due to the inability to sell an investment quickly and at a fair price.

4. Operational Risk: Operational risk refers to the risk that arises due to problems in the operations of the firm such as fraud, errors, and system failures.

5. Event Risk: Event risk refers to the risk that arises due to unexpected events such as natural disasters, terrorist attacks, and political instability.

Conclusion: In conclusion, risk is an important factor that needs to be considered while making investment decisions. Investors and firms need to identify the different types of risks associated with an investment and take appropriate measures to manage these risks. Capital Budgeting helps in identifying and evaluating potential investment opportunities to maximize long-term profitability while considering the risk involved.

Answer

A

Answer

Which of the following refers to planning and deployment of available capital for the purpose ofmaximizing long-term profitability of the firm.
(A)
Risky Investment
(B)
Risk-free Rate
(C)
Capital Budgeting
(D)

Capital Rationing

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