corporate finance

Question 1

areas of finance

Answer 1

corporate finance
investments
financial markets & institutions

Question 2

financial management

Answer 2

managing firms money to meet its goals; managers work w/ financial personnel, use financial data by accountants to make decisions

Question 3

financial manager responsibilities

Answer 3

financial planning
investment
financing

Question 4

goals of financial manager

Answer 4

maximize value of firm to its owners; make balance between opportunity for profit and potential for loss

Question 5

risk-return tradeoff

Answer 5

higher the risk, greater return that is required

risk: potential for loss
return: opportunity for profit

Question 6

how do organizations use funds

Answer 6

short-term expenses: support day to day activities

long-term expenses/capital expenditures: fixed assets

cash: lifeblood of business, ensure enough to meet unexpected expenses

shorten time between purchase of inventory or services and collection from sales

Question 7

accounts receivable

Answer 7

sales for which firms hasn’t yet been paid
goal: collect money asap

Question 8

inventory

Answer 8

production, marketing, finance managers have different perspective on inventory
- production: wants lots of raw materials to avoid production delays
- marketing: lots of finished goods to fulfill customer orders quickly
- financial: want least inventory possible without harming production/sales

Question 9

long-term expenses/capital expenditures

Answer 9

analyze long-term projects and select those that offer best returns while maximizing firm’s value

Question 10

obtaining financing

Answer 10

borrow money, sell ownership shares, retained earnings

Question 11

unsecured vs. secured loans

Answer 11

unsecured: made on basis of firm’s credit worthiness and lender’s previous experience with the firm

secured: require borrower to pledge specific assets as collateral or security; lender can take collateral if borrower doesn’t repay loan

Question 12

debt vs. equity financing: ability to influence management

Answer 12

debt
- creditors usually have none, unless borrower defaults on payment

equity
- common stockholders have voting rights

Question 13

debt vs. equity financing: claim on income and assets

Answer 13

debt
- debt holders rank ahead of equity holders. payment of interest and principal is contractual obligation of firm

equity
- equity owners have residual claim on income; no obligation to pay dividends

Question 14

debt vs. equity financing: maturity

Answer 14

debt
- stated maturity, required repayment of principal by particular date

equity
- company not required to repay equity, has no maturity date

Question 15

debt vs. equity financing: tax treatment

Answer 15

debt
- interest is tax deductible expense

equity
- dividends not tax deductible; paid from after tax income

Question 16

term loan

Answer 16

business loan with maturity of more than one year
- usually 5-14 years
- un or secured
- payments include interest/principal, loan balance declines over time

Question 17

bonds

Answer 17

long term liabilities of corporations and government issuer of bond must pay buyer fixed amount of money – “interest” – on a coupon rate, regular schedule

Question 18

mortgage loan

Answer 18

long-term loan made against real-estate as collateral lender takes on mortgage on property, lets lender size/sell if borrower fails to make scheduled payments

Question 19

selling new issues of common stock

Answer 19

common stock: security that represents ownership interest in a corporation
initial public offering (IPO): company’s first sale of stock to public

Question 20

dividends and retained earnings

Answer 20

dividends: payments to stockholders from a corporation’s profits; can be paid in cash/stock
retained earnings: profits that have been reinvested in firm, big advantage over other sources of equity capital

Question 21

preferred stock

Answer 21

has dividend mount that’s set at time stock is issued. increases firm’s financial risk; more expensive than debt financing

Question 22

venture capital

Answer 22

often used by small firms not big enough to sell public securities
- invest in new business in return for ownership
- private foundations, states, wealthy individuals

Question 23

accounting vs. finance

Answer 23

accounting -
purpose: communicate financial position
fin. statements: prepare
orientation: past, results
focus: rules, accuracy

finance -
purpose: determine how and where to add value
fin. statements: analyze
orientation: future, projections
focus: analysis, insights

Question 24

public company reporting

Answer 24

public companies are required to file w/ the SEC:
- annual reports (form 10-k)
- quarterly reports (form 10-q)
- current reports (8-k)

SEC sets the disclosure requirements - topics that all companies must cover in their 10-K or 10-Q, how the information should be presented

• companies cannot make material false/misleading statements
• CFO and CEO must certify to accuracy of 10-K and 10-Q
• quarterly reports must be reviewed by external auditors
• SEC does not vouch for accuracy of 10-K or 10-Q

Question 25

annual report 10-K

Answer 25

• primary method of communication with external users is the annual report
• management discussion and analysis
• external auditor’s report
• financial statements

Question 26

MD&A

Answer 26

• narrative explanation of company’s financial performance and condition
• provide context for financial statements
• risks facing the company

Question 27

footnotes

Answer 27

disclose the accounting policies that are most important to the portrayal of the company’s financial condition and results