Fundamentals Of Corporate Finance Flashcards
What is the Primary goal of financial management ?
- maximise firm value
What are the three components of triple bottom line ?
People
Profit
Planet
What does capital budgeting involve ?
Planning and managing a firms long term investments
What is the mixture of debt and equity a firm uses called ?
Capital structure
The role of working capital management ?
Managing the firms short term assets and liabilities
What is the relationship between investment, financing and liquidity ?
Cash invested in assets must match cash raised by financing
Primary market ?
Where governments and corporations first issue securities
Purpose of balance sheet
To show the company’s assets, liabilities and equity
Equation which represents the balance between assets, liability and equity
Assets= liabilities + equity
Term used when a firm decides to keep some profits to reinvest in the business rather than distribute them to shareholders ?
Retained earnings
Goal of financial management often referred to as ?
Maximising current share price
Who is responsible for overseeing managers of the firm ?
Board of directors
Which theory suggests that managers are stewards of the firm and work to ensure assets are used appropriately for the firms long term success ?
Stewardship theory
What does agency theory imply ?
Managers need to be contracted to align with shareholders interests
Principle of comply or explain?
Companies must comply with regulations or explain why they choose not to
Risk associated with cash flows ?
Timing
Terms for the practice of offering new equity to existing shareholders first, before public
Pre-emptive rights
Which market involves buying and seeking securities after the initial public offering ?
Secondary market
The process of managing a firms short term assets and liabilities is known as ?
Working capital management
What does the sarbanes- oxley act regulate in the us ?
Corporate governance policies
which of the following if the primary goal of financial management in investments decisions ?
-maximising profits
-increase market share
-maximising the value of equity
-reducing costs
Maximising value of equity
Capital budgeting primarily focuses on ?
Short term investments
Long term investments
Liquidity management
Dividend policy
Long terms investments
Which of the following is not a step in capital investment process ?
Identification of investment opportunities
Evaluation of competitors
Post audit
Selection of most lucrative project
Evaluation of competitors
NPV is calculated by ?
Subtracting the present value of the cash outflows from the Preston value of the cash inflows
A project should be accepted according to NPV decision rule if its NPV is ?
Equal to zero
Greater than zero
Less than zero
Equal to initial investment
Greater than zero
Strength of NPV method ?
Discounts all cash flows properly
Payback period measures ?
The time required for an investment to generate enough cash flows to recover its initial cost
Discounted payback period method considers ?
Time value of money
Profitability index (PI)
The present value of an investments future cash flows divided by its initial cost
A PI greater than 1 indicates that ?
The projects benefits exceed its costs
Disadvantage of payback period
Ignores time value of money
In discounted payback period method, project is accepted if ?
Discounted payback period is LESS than the benchmark
What is true about NPV and Profitability Index ?
They use the same inputs and thus yield consistent decisions
Main focus of capital budgeting
Evaluating long term investment opportunities
Which investment criteria is considered easiest to compute but least theoretically robust ?
Payback period
How does discounted payback period differ from payback period ?
It accounts for time value of money
If a projects NPV is zero ?
The projects rate of return equals the discount rate
Which cash flows should be included in a projects analysis when using the stand alone principle ?
All cash flows that are incremental to the project
How should the side effect of erosion be treated in capital budgeting ?
It should be included as a cost to the new project
What is meant by incremental cash flows in capital budgeting ?
The additional cash flows generated by taking on a new project
Which principle states that a projects NPV should be evaluated based on its own incremental cash flows ?
Stand alone principle
Definition of opportunity cost in the context of capital budgeting ?
Most valuable alternative given up when a projects is undertaken
Why is it important to exclude non-incremental cash flows when making capital budgeting decisions ?
They don’t change regardless of the project decision
What effect does a higher salvage value have on depreciation expense ?
Decreases annual depreciation expense
What effect does a lower salvage value have on depreciation expense ?
It increases the annual depreciation expense
Which depreciation method allows for an accelerated write off of assets over their useful life ?
Reducing balance method
Which method in calculating Operating Cashflow starts with net income and adds back depreciation?
Bottom-up approach
