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Corporate Finance > Fundamentals Of Corporate Finance > Flashcards

Fundamentals Of Corporate Finance Flashcards

1
Q

What is the Primary goal of financial management ?

A
  • maximise firm value
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2
Q

What are the three components of triple bottom line ?

A

People
Profit
Planet

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3
Q

What does capital budgeting involve ?

A

Planning and managing a firms long term investments

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4
Q

What is the mixture of debt and equity a firm uses called ?

A

Capital structure

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5
Q

The role of working capital management ?

A

Managing the firms short term assets and liabilities

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6
Q

What is the relationship between investment, financing and liquidity ?

A

Cash invested in assets must match cash raised by financing

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7
Q

Primary market ?

A

Where governments and corporations first issue securities

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8
Q

Purpose of balance sheet

A

To show the company’s assets, liabilities and equity

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9
Q

Equation which represents the balance between assets, liability and equity

A

Assets= liabilities + equity

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10
Q

Term used when a firm decides to keep some profits to reinvest in the business rather than distribute them to shareholders ?

A

Retained earnings

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11
Q

Goal of financial management often referred to as ?

A

Maximising current share price

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12
Q

Who is responsible for overseeing managers of the firm ?

A

Board of directors

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13
Q

Which theory suggests that managers are stewards of the firm and work to ensure assets are used appropriately for the firms long term success ?

A

Stewardship theory

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14
Q

What does agency theory imply ?

A

Managers need to be contracted to align with shareholders interests

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15
Q

Principle of comply or explain?

A

Companies must comply with regulations or explain why they choose not to

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16
Q

Risk associated with cash flows ?

A

Timing

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17
Q

Terms for the practice of offering new equity to existing shareholders first, before public

A

Pre-emptive rights

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18
Q

Which market involves buying and seeking securities after the initial public offering ?

A

Secondary market

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19
Q

The process of managing a firms short term assets and liabilities is known as ?

A

Working capital management

20
Q

What does the sarbanes- oxley act regulate in the us ?

A

Corporate governance policies

21
Q

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

A

Maximising value of equity

22
Q

Capital budgeting primarily focuses on ?
Short term investments
Long term investments
Liquidity management
Dividend policy

A

Long terms investments

23
Q

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

A

Evaluation of competitors

24
Q

NPV is calculated by ?

A

Subtracting the present value of the cash outflows from the Preston value of the cash inflows

25
Q

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

A

Greater than zero

26
Q

Strength of NPV method ?

A

Discounts all cash flows properly

27
Q

Payback period measures ?

A

The time required for an investment to generate enough cash flows to recover its initial cost

28
Q

Discounted payback period method considers ?

A

Time value of money

29
Q

Profitability index (PI)

A

The present value of an investments future cash flows divided by its initial cost

30
Q

A PI greater than 1 indicates that ?

A

The projects benefits exceed its costs

31
Q

Disadvantage of payback period

A

Ignores time value of money

32
Q

In discounted payback period method, project is accepted if ?

A

Discounted payback period is LESS than the benchmark

33
Q

What is true about NPV and Profitability Index ?

A

They use the same inputs and thus yield consistent decisions

34
Q

Main focus of capital budgeting

A

Evaluating long term investment opportunities

35
Q

Which investment criteria is considered easiest to compute but least theoretically robust ?

A

Payback period

36
Q

How does discounted payback period differ from payback period ?

A

It accounts for time value of money

37
Q

If a projects NPV is zero ?

A

The projects rate of return equals the discount rate

38
Q

Which cash flows should be included in a projects analysis when using the stand alone principle ?

A

All cash flows that are incremental to the project

39
Q

How should the side effect of erosion be treated in capital budgeting ?

A

It should be included as a cost to the new project

40
Q

What is meant by incremental cash flows in capital budgeting ?

A

The additional cash flows generated by taking on a new project

41
Q

Which principle states that a projects NPV should be evaluated based on its own incremental cash flows ?

A

Stand alone principle

42
Q

Definition of opportunity cost in the context of capital budgeting ?

A

Most valuable alternative given up when a projects is undertaken

43
Q

Why is it important to exclude non-incremental cash flows when making capital budgeting decisions ?

A

They don’t change regardless of the project decision

44
Q

What effect does a higher salvage value have on depreciation expense ?

A

Decreases annual depreciation expense

45
Q

What effect does a lower salvage value have on depreciation expense ?

A

It increases the annual depreciation expense

46
Q

Which depreciation method allows for an accelerated write off of assets over their useful life ?

A

Reducing balance method

47
Q

Which method in calculating Operating Cashflow starts with net income and adds back depreciation?

A

Bottom-up approach

Corporate Finance (1 decks)

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