CH 1

Question 1

What Does Corporate Finance Deal With?

Answer 1

-What should the firm invest in?
-How do we finance these investments? (Debt or owner’s equity)
-How will we manage the everyday financial activities?

Question 2

What Does Capital Budgeting Deal With

Answer 2

-What long-term investments should we take on?

Question 3

What Does Capital Structure Deal With

Answer 3

How should we finance assets? (Bonds, debt, or equity)

Question 4

Balance Sheet Identity (Equation)

Answer 4

Assets = Liabilities + Stockholders Equity

Question 5

Define Capital Budgeting

Answer 5

The process of planning & managing the firm’s long-term investments

Question 6

How to Conduct Capital Budgeting

Answer 6

-Estimate cash flows (How much $$$)
-Estimate the cost of the cash flows (Find the interest rate)
-Discount the cash flows (compare and assess)

Do benefits outweigh the cost?

Question 7

Cash flows generated by the asset must ————————————

Answer 7

Exceed the cost of the asset

Question 7

What do Financial Managers Need to Know?

Answer 7

-The size (How much? 5 mil or 1mil)
-The timing (Today or 80y from now)
-The risk (Need to know the probability)

Question 8

Define Capital Structure

Answer 8

The mix of debt/equity describes how the firm is financed

Question 9

What Does Short-term cash flow management deal with?

Answer 9

-Networking Capital
-Cash Management
-Credit Management

Question 10

What is the equation for short-term cash flow

Answer 10

Net-working capital = Current Assets (CA) - Current Liabilities (CL)

Question 11

What does a firm mean when presenting a credit offer of: 2/10 net 30 days

Answer 11

2% off if paid in 10 days. Will remain the same by day 30

Question 12

What are the types of markets? What do they do?

Answer 12

Primary- firm is involved and is the one receiving the money

Secondary- Involves receivers (Investors)

Question 13

What are the two types of secondary markets?

Answer 13

-Dealer markets in stock and long-term debt are called over-the-counter (OTC) markets, meaning the dealers are connected electronically instead of transacting in a central location

-Auction markets differ from dealer markets in two ways:
An auction market or exchange has a physical location
Primary purpose is to match those who wish to sell with those who wish to buy (with dealers playing a limited role), whereas most of the buying and selling is done by the dealer in a dealer market

Question 14

If I want to buy a bond from a dealer, What are you going to pay?

Answer 14

You’re going to pay the Ask

Ask-sell or
Bid-Buy

Question 15

A firm has 100 dollars in debt and comes across 500 dollars. How much does the firm pay in debt and how much do the stockholders get?

Answer 15

Debt- 100
Stockholder- 400

Question 16

What are the forms of Business Organizations

Answer 16

Self Proprietorship
Parternship
Corporation

Question 17

What are the advantages & disadvantages of a self proprietorship?

Answer 17

Advantages:
-Easy
-Least Regulated
-Single own keep profits
-Taxed Once!

Disadvantages:
-Limited to one owner
-Equity Capital limits owner’s wealth
-UNLIMITED LIABILITY
-Could go after personal assets

Question 18

What are the advantages & disadvantages of a partnership?

Answer 18

Advantages:
Two or more owners
More capital
Easy to start
Taxed once as personal income

Disadvantages:
UNLIMITED LIABILITY
Partnership dissolves if one person dies or tries to sell

Question 19

What are the advantages & disadvantages of a Corporation

Answer 19

Advantages:
LIMITED LIABILITY
UNLIMITED LIFE
Separation of ownership and managment
Transfer of ownership
Easier to raise capital

Disadvantages:
DOUBLE TAXATION taxed as corporate and personal

Question 20

What is the ultimate goal of financial management

Answer 20

Maximize current value of the company stock
-Brings value to company and helps communities

Question 21

What is the Sarbanes- Oxley Act (i.e. Sox)?

Answer 21

Protects investors from corporate abuse

Question 22

What is Agency Cost

Answer 22

The costs of the conflict of interest between stockholders and management.

Question 23

-What are the major areas in finance?
-What is the capital budgeting decision?
-What do you call the specific mixture of long-term debt and equity that a firm chooses to use?
-What are the three forms of business organization?
-Why is the corporate form superior when it comes to raising cash?
-What are agency problems and how do they come about? What are agency costs?
-What is a dealer market? How do dealer and auction markets differ?

Answer 23

Answer