Ch 1: Introduction to Corporate Finance

Question 1

What is involved in a capital budgeting decision?

Answer 1

long term assets

Question 2

What is involved in a capital structure decision?

Answer 2

• how the firm can raise $$ for capital expenditures

- proportions of the firm’s financing from current and long-term debt & equity

Question 3

What is net working capital?

Answer 3

difference between current assets and current liabilities

Question 4

What are the forms of business organization?

Answer 4

• sole proprietorship
• partnership (general and limited)
• corporation (public or private)

Question 5

What are the pros of going public?

Answer 5

• obtain $$ that does not have to be repaid (stocks)
• increased visibility
• market valuation

Question 6

What are the cons of going public?

Answer 6

• costly
• management loses some of its freedom to act without board approval
• open to scrutiny
• public reporting
• company may be taken over

Question 7

What is the goal of financial management?

Answer 7

maximize shareholder wealth

Question 8

What is the agency problem?

Answer 8

• stockholders (principals) hire managers (agents) to run the company
• managers and stockholders may have different goals

Question 9

What are some managerial goals? (agency problem)

Answer 9

• expensive prerequisites
• survival
• independence
• increased growth and size are not necessarily equivalent to increased shareholder wealth