Chapter 1: Market Value, CF's, Present Value

Question 1

Corporate finance (def.)

Answer 1

Finance in which the focus is on bigger companies, still the techniques can be applied to smaller firms aswell

Question 2

Market value (def.) (2)

Answer 2

= present value of cash flows
= price for which a stake in an investment or firm can be sold to another investor

Question 3

Accounting value (def.) (2)

Answer 3

= book value
= can be seen on the balance sheet

Question 4

Operational risk/ Business risk (def.)

Answer 4

A risk that depends on the choices in business activity

Question 5

Categories of funding (2)

Answer 5

• equity funding
• debt funding

Question 6

Debt investor receives what compensation?

Answer 6

Receives some compensation and repayment for the principal sum

Question 7

Equity investors (3)

Answer 7

• agree to whatever is left after all stakeholders have been paid
• residual claim holders
• face more risk

Question 8

Required rate of return is compensation for what 3 factors?

Answer 8

• sacrifice of liquidity
• subject to inflation
• risk

Question 9

What is the risk free rate based on?

Answer 9

Based on the interest countries like Germany (stable countries) pay to people they lend money from

Question 10

Present Value (def)

Answer 10

today’s value of future cash flows

Question 11

Annuity (def.)

Answer 11

A series of payments made at equal intervals

Question 12

Perpetuity (def.)

Answer 12

A stream of CF’s that never stops

Question 13

Types of Cash Flows (3)

Answer 13

• CF from operations (day to day operations)
• CF from investing (repairing, vital fixed assets)
• CF from financing (payments to and from investors)

Question 14

Interest payments are not legal obligations

True or false?

Answer 14

False

They are legal obligations that must be made even when operational CF is negative