CORPORATE FINANCE Flashcards
With a on-tier board structure:
Both execs and non execs can serve on the board of directors (independent directors, and senior managers)
organizational structure is best described as:
a company’s internal systems and practices for managing stakeholder relationships
ACTUAL PROCEDURE, NOT A FRAMEWORK
The relationship between a company’s shareholders and its senior managers is best described as a __________ relationship:
agency relationship
principal-agent relationship
stakeholders most likely to be concerned with their legal liabilities are:
directors
Thematic investing is most accurately described as:
considering a single environmental or social factor when selecting investments. (ESG)
Define stakeholder theory
the interests of community groups affected by a company’s operations
Four steps of the capital budgeting process
Generate investment ideas
Analyze project ideas
Create firm-wide capital budget
Monitor decisions and conduct a post-audit
Categories of capital projects include:
Replacement for maintaining the business or for cost reduction
Expansion
New product/Market Development
Mandatory environmental/regulatory requirements
Other, such as R&D, or pet projects of senior management
For a project with cash outflows during its life, the least preferred capital budgeting tool would be:
IRR
The discounted payback period is generally ________ than the regular payback
Longer
in an NPV profile, the IRR is represented as the intersection of the NPV profile with the ______ axis.
X-Axis (hoizontal)
NPV | |\ |_\\_\_\_\_\_\_\_\_\_\_\_\_\_cost of capital IR
3 approaches to estimating k_ce
- CAPM Approach
2. dividend discount model: = (D_1/P_0)+g
Define Business Risk
the uncertainty about EBIT, resulting from variability in sales and expenses; MAGNIFIED BY OPERATING LEVERAGE
Define Financial Risk
additional variability of EPS compared to EBIT
increases with greater use of fixed cost financing (debt) in a company’s capital structure
Using more debt and less equity in a firm’s capital structure _____ Net Income, via added _______.
reduces; interest expense
What is the net effect of using more debt and less equity on ROE?
Increase -OR- Decrease, in ROE
Business Risk is higher when fixed costs are the _______ portion of expenses
highest
higher operating expense = higher operating leverage;
EBIT is lower, therefore a firm is more susceptible to changes in the BUSINESS CYCLE
If two Stock X and Stock Y have identical Betas, but the unsystematic risk is higher for X than Y, than according to CAPM, in equilibrium:
Stock X will have higher standard deviation (total risk), than Stock Y, but an equal E(R) to Stock Y.
Investor in a sponsored depository receipt (DR):
holds the voting rights for the DR shares.
With cumulative voting system, an investor who holds 1000 shares can cast a _____ votes for a board member serving 3-year terms. What is it under a statutory voting system?
3,000; 1,000 per seat on the board.
What is the reason a Commodities Index, and a Fixed Income Index require frequent reconstitution?
Futures contracts expire; and Bonds mature
Matching by order is and not by a specified PRICE or QUOTE is an example of a ___________ network.
Electronic Crossing Network (i.e. Order-Driven Market)
