Financial Markets and Instruments

Statement 1 is correct: FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the market of a foreign nation. Statement 2 is incorrect: In FII, the companies only need to get registered in the stock exchange to make investments. Foreign Institutional Investment is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. Statement 3 is correct: Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise.

Fund accounting is a system of accounting widely used in non-business entities, such as nonprofits, government agencies, churches, hospitals and colleges and universities. Fund accounting differs from traditional business accounting, which focuses on identifying how successful an entity has been at creating profits. Since nonprofits and governments are not designed to generate profits, an alternative accounting method gives them a more fitting approach to tracking and reporting their finances.

Value of a financial instrument will fluctuate

Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Foreign direct investment has many forms. Broadly, foreign direct investment includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra-company loans. FDI usually involves participation in management, joint-venture, transfer of technology and expertise.

This is the right answer.

All four statements are correct. A ratio compares two quantities arithmetically. Liquid ratio is the acid-test ratio (excluding inventory). The 2:1 rule is a benchmark for current ratio. Debt-equity ratio compares external funds to shareholders' funds.

Financial management encompasses both raising funds (procurement) and deploying them effectively (utilization). Option A captures this dual scope completely, while other options focus on only one aspect.

Statement (i) is correct - working capital funds day-to-day operations. Statement (ii) is false - circulating capital refers to capital that circulates/changes form, not current assets specifically. Current assets include cash, inventory, receivables which do change form, but the definition is imprecise.

The Basel II and Basel III frameworks are built on three pillars: Pillar 1 covers minimum capital requirements, Pillar 2 covers supervisory review processes, and Pillar 3 covers market discipline through disclosure requirements. Book keeping is a basic accounting function, not a pillar of the capital adequacy framework.

Operating leverage (2) refers to the presence of fixed costs in the cost structure - fixed operating costs amplify the impact of sales changes on operating income. Financial leverage (3) relates to fixed return funds (debt) in capital structure. Super-leverage (1) or combined leverage captures the total impact of sales changes on shareholder earnings by combining both operating and financial leverage effects.

Gilt-edged refers to stocks or securities (such as gilts) that are regarded as extremely reliable investments.

The author has talked about study of human nature and trying to judge the trend in which the investors would behave in future. So, (1) is the only relevant option. (2) & (4) choices have specifically mentioned about 'software' but 'software' is simply a reference taken by the author and so, 'software doesn't come into picture in the central idea. (3) can't be the answer as 'inherent danger' of stock market does not come in the central idea.

By the excessive working capital, the funds remain idle as the company has more funds than required. When funds remain idle, no profit is earned on idle funds. Hence, proper rate of return is not earned on the investment of the company.

The relation between cash dividends and retained earnings is reciprocal. The retained earning is the part of profits which is not distributed as profits and is kept by the company. If the company decides to distribute major part of profits as dividend in the form of cash, then obviously it would have less earnings left to be retained or kept and vice-versa.

It is an internal factor affecting the dividend policy as it is concerned with the company in particular. If the company needs funds for larger profitable projects, the company would retain the major part of the earnings and distribute less dividends.