Chapter 1: Introduction to Corporate Finance

Question 1

Capital budgeting

Answer 1

the process of planning and managing a firm’s investment in long-term assets
○ Managers decide on which opportunities will be worth while to the company
§ Will they receive more in capital gain from the asset than the asset costs
Que

Question 2

Question 2: How will they obtain and manage the long -term financing it needs to support long term investments

Answer 2

• Capital structure –>the mix of debt and equity maintained by the a firm owned

Question 3

• Capital structure –>

Answer 3

the mix of debt and equity maintained by the a firm owned

Question 4

Working capital management

Answer 4

difference between a firms short-term assets, such as inventory, and its short term liabilities, such as money owed to suppliers.

Question 5

Sole proprietorship

Answer 5

• A business owned by a single individual
○ Simplest type of business to for and regulate
○ Owner keeps all profits but also has unlimited liability
§ Creditors can look beyond business assets to receive payment
§ There is no distinction between the person and the business

Question 6

Partnership

Answer 6

• A business formed by two or more co-owners
○ General partnership–> all partners share in gains and losses and all have unlimited liability
○ Partnership agreement-divided the gains and losses

Question 7

Limited partnership-

Answer 7

one or more general partners have unlimited liability and run the business for the limited partners who do not actively participate in the business. Limited partners have limited liability for the amount they invest in the company.

Question 8

• Key disadvantages for Sole proprietor and partnerships

Answer 8

1. Unlimited liabilities for business debts on the part of the owners
   2. Limited life of the business
   3. Difficulty of transferring ownership.

Question 9

Corporation

Answer 9

• A business created as a distinct legal entity owned by one or more individuals or entities

Question 10

REIT-

Answer 10

a real estate investment trust is a company that owns or finances income-producing real estate

Question 11

Co-operative (Co-op)

Answer 11

An enterprise that is equally owed by its members .

Question 12

Consumer co-op–

Answer 12

provides products or services to its members (such as a retail co-op, housing, healthier-care

Question 13

Producer co-op

Answer 13

this processes and markets the goods or services produced by its members , supplies products or service necessary to the members professional

Question 14

What is corporate finance ?

Answer 14

• Corporate finance is essentially a study of these Three basic questions to start a business

	1. What long term investments should you take on ?
	2. Where will you get the long term financing to pay for you investment 
	3. How will you manage you everyday financial activities , such as collecting from customers and paying suppliers?

Question 15

Worker co-op –

Answer 15

provides employer rent for its members

Question 16

Multi-stakeholder co-op

Answer 16

this serves the needs of different stakeholder groups such as employees, clients, and other interested individuals and organization

Question 17

The Goal of Financial Management

Answer 17

• Maximize the current value per share of existing stock
○ Only get paid once employees, suppliers and creditors have been paid.
• A more general goal
○ Maximize the market value of the company and this will increase the market value of the owner’s equity

Question 18

The agency relationship-

Answer 18

the relationship between the shareholders and management

Question 19

The agency problem-

Answer 19

the possibility of conflicts of interest between the shareholders and management of a firm

Question 20

Agency costs

Answer 20

the cots of the conflicts of interest between the shareholders and management

Question 21

Direct agency costs

Answer 21

• Corporate expenditures

- Direct Agency Costs

Question 22

Corporate expenditures

Answer 22

management getting a new jet costs the shareholders but not management

Question 23

Direct Agency Costs

Answer 23

cost from monitoring management actions (paying outside auditors )

Question 24

Corporate Social Responsibility

Triple bottom line

Answer 24

The company’s commitment to operate in an economically, socially, and environmentally sustainable manner.

Question 25

Money Markets

Answer 25

Financial markets where short-term debt securities are bought and sold (IOUs)

Question 26

Capital markets

Answer 26

Financial markets where long-term debt and equity securities are bought and sold.

Question 27

Primary market

Answer 27

○ Refers to the original sale of securities by governments and corporations. Two types

		1. Initial public offerings--> selling to the public  
                   2. Private placements--> a negotiated sale involving a specific buyer

Question 28

Secondary market

Answer 28

○ Where securities are bought and sold after the primarily market–> transferring ownership of corporate securities.
○ Involves one owner or credit selling to another.
Two types
1. Auction Markets
2. Dealer Markets

Question 29

Auction markets

Answer 29

□ Has a physical location (wall street)

Matches those who wish to sell with those who wish to buy

Question 30

Dealer markets

Answer 30

Done on over the counter

Question 31

Third markets

Answer 31

Involves trading exchange-listed securities in over-the counter markets

Question 32

Four markets

Answer 32

Involves institution-to-institution trading without using the services of brokers or dealers.

Question 33

Hedge Funds-

Answer 33

largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds

Question 34

Financial engineers

Answer 34

creation of new securities or financial processes
○ Reduces and controls risk and minimizes taxes
○ Creates a variety of debt and equity securities and reinforces the trend toward securitization of credit introduced earlier.