Chapter 1: Introduction to Corporate Finance

Question 1

Capital Budgeting

Answer 1

The process of making and managing expenditures on long-lived assets.

Question 2

Capital Structure

Answer 2

The proportions of the firm’s financing from current liabilities, long-term debt, and equity.

Question 3

Net Working Capital

Answer 3

Current assets - current liabilities

Question 4

Sole Proprietership

Answer 4

A business owned by one person.

Question 5

Partnership

Answer 5

A business owned by two or more people.

Question 6

General Partnership

Answer 6

All partners agree to provide some fraction of the work and cash and share the profits and losses. Each partner is liable for all of the debts of the partnership. A partnership agreement specifies the nature of the arrangement. The partnership agreement my be an oral agreement or a formal document setting forth the understanding.

Question 7

Limited Partnership

Answer 7

Permits liability of some of the partners to be limited to the amount of cash each has contributed to the partnership. Limited partnerships usually require that (1) at least 1 partner be a general partner and (2) the limited partners do not participate in managing the business.

Question 8

Corporation

Answer 8

A business that is identified as a distinct legal entity with its own name and many of the legal powers of natural persons.

Question 9

Agency Problem

Answer 9

When a conflict of interest arises between the principal and the agent.

Question 10

Stakeholders

Answer 10

Parties with an interest in the firm’s decisions outside of management and stockholders. i.e., employees, customers, suppliers, government agencies, etc.