0412-123 Midterm Solved Questions & Study Guide (Fall 2025)

0412-123 Principles of Finance Midterm Exam Solved Questions — Semester Fall 2025

Introduction

The Principles of Finance (0412-123) course is a cornerstone of the BBA program at Daffodil International University (DIU), designed to equip students with foundational knowledge in financial management, investment decisions, and corporate finance. This midterm exam for Fall 2025 tests your understanding of key concepts such as time value of money, sources of finance, and short-term financing strategies—topics critical for both academic success and real-world business applications.

For DIU BBA students, practicing past exam questions is one of the most effective ways to prepare. Not only does it familiarize you with the exam format and question types, but it also reinforces theoretical concepts through practical application. In this guide, we’ll solve every question from the 0412-123 Principles of Finance midterm paper, providing step-by-step explanations, formulas, and real-world examples to ensure you grasp the material thoroughly. Whether you're revising for the midterm or building a strong foundation for future finance courses, this resource is tailored to help you excel.

Exam Overview & Mark Distribution

The Principles of Finance midterm exam (Fall 2025) consists of two main questions, covering CLO 01 (Understanding the Basics of Finance) and CLO 02 (Sources and Uses of Finance). The total marks for this paper are 10, distributed as follows:

• Question 1: 9 marks (3 sub-questions)

- (i) Definition of Ordinary Annuity + Internal Sources of Finance (3 marks)

- (ii) Principles of Business Finance Illustrated in Figures (4 marks)

- (iii) Definitions of Spontaneous Short-Term Finance and Compensating Balance (3 marks total)

• Question 2: 1 mark (Short-term financing evaluation, continued in the next part of the paper)

Solved Questions

### Question 1(i): Define Ordinary Annuity. Explain the internal source of finance with examples. [3 Marks]

To answer this question, we’ll break it down into two parts: the definition of an ordinary annuity and an explanation of internal sources of finance.

1. Definition of Ordinary Annuity

• An ordinary annuity (also called an annuity in arrears) is a series of equal cash flows that occur at the end of each period for a fixed number of periods.
• Examples include loan repayments, rent payments, or bond coupon payments made at the end of each month or year.
• The time value of money is a key concept here, as the present or future value of these cash flows can be calculated using annuity formulas:

- Present Value (PV) of an Ordinary Annuity:

\[

PV = PMT \times \left( \frac{1 - (1 + r)^{-n}}{r} \right)

\]

where \(PMT\) = periodic payment, \(r\) = interest rate per period, \(n\) = number of periods.

- Future Value (FV) of an Ordinary Annuity:

\[

FV = PMT \times \left( \frac{(1 + r)^n - 1}{r} \right)

\]

2. Internal Sources of Finance

• Internal sources of finance refer to funds generated within the business rather than from external lenders or investors. These are typically low-cost or no-cost sources of capital.
• Examples of Internal Sources:

1. Retained Earnings: Profits reinvested in the business instead of distributed as dividends. For example, if Apex Consumer Products Ltd. earns Tk. 5 crore in profit and retains Tk. 3 crore, this amount can be used to finance working capital.

2. Depreciation: A non-cash expense that reduces taxable income but provides cash flow. For instance, if a company’s machinery depreciates by Tk. 1 crore annually, this amount can be reinvested.

3. Sale of Assets: Selling unused or underutilized assets (e.g., old machinery, surplus inventory) to generate cash. For example, a company might sell an old warehouse to fund its seasonal working capital needs.

4. Working Capital Management: Reducing the cash conversion cycle by optimizing inventory, receivables, and payables. For instance, negotiating longer payment terms with suppliers can free up cash for short-term needs.

Final Answer:

An ordinary annuity is a series of equal payments made at the end of each period. Internal sources of finance include retained earnings, depreciation, sale of assets, and working capital management, which provide funds without relying on external lenders.

### Question 1(ii): Explain the principles of business finance illustrated in Figures 1 and 2, and discuss the relationships between the variables presented in each figure. [4 Marks]

Note: Since Figures 1 and 2 are not provided in the OCR, we’ll assume typical graphs used in Principles of Finance courses at DIU, such as:

• Figure 1: The Time Value of Money (TVM) graph showing the relationship between present value (PV), future value (FV), interest rate (r), and time (n).
• **Figure