Introduction to Corporate Finance

Question 1

Statement of financial position is an accountant’s _______ of the firm’s accounting value on a particular date. It has two sides: on the left are the ______ and on the right the _____ and ______’ ____. It states what the firm ____ and how it is ______.

Answer 1

Statement of financial position is an accountant’s snapshot of the firm’s accounting value on a particular date. It has two sides: on the left are the assets and on the right the liabilities and shareholders’ equity. It states what the firm owns and how it is financed.

*AKA Balance Sheet

Question 2

______ ≡ Liabilities + Shareholders’ equity

Answer 2

Assets ≡ Liabilities + Shareholders’ equity

• three-line equality in the equation to indicate that it must always hold

Question 3

The liabilities and the shareholders’ equity are listed in the order in which they must be ______.

Answer 3

The liabilities and the shareholders’ equity are listed in the order in which they must be paid.

Question 4

When analyzing the statement of financial position, the financial manager should be aware of three issues: L DvE VvC

Answer 4

When analyzing the statement of financial position, the financial manager should be aware of three issues: liquidity, debt versus equity, and value versus cost.

Question 5

Liquidity refers to the ease and speed with which assets can be ______ to _____.

Answer 5

Liquidity refers to the ease and speed with which assets can be converted to cash.

Question 6

______ assets are the most liquid and include cash and those assets that can reasonably be expected to be turned into cash within a year from the date of the balance sheet.

Answer 6

Current assets are the most liquid and include cash and those assets that can reasonably be expected to be turned into cash within a year from the date of the balance sheet.

Question 7

____ ________ are the amounts not yet collected from customers for goods or services sold to them (after adjustment for potential bad debts).

Answer 7

Accounts receivable are the amounts not yet collected from customers for goods or services sold to them (after adjustment for potential bad debts).

Question 8

_____ is composed of raw materials to be used in production, work in process, and finished goods.

Answer 8

Inventory is composed of raw materials to be used in production, work in process, and finished goods.

Question 9

Long-term assets are the _____ liquid kind of asset.

Answer 9

Long-term assets are the least liquid kind of asset.

Question 10

_____ long-term assets include property, plant, and equipment.

Answer 10

Tangible long-term assets include property, plant, and equipment.

Question 11

Intangible assets are the value of a ______, the value of a _____, and the value of ______ ________.

Answer 11

Intangible assets are the value of a trademark, the value of a patent, and the value of customer recognition.

Question 12

Liabilities are ______ of the firm that require a ____ of cash within a stipulated ____ _____.

Answer 12

Liabilities are obligations of the firm that require a payout of cash within a stipulated time period.

Question 13

Liabilities are debts and are frequently associated with nominally fixed cash burdens, called _____ ____, that put the firm in default of a contract if they are not paid.

Answer 13

Liabilities are debts and are frequently associated with nominally fixed cash burdens, called debt service, that put the firm in default of a contract if they are not paid.

Question 14

Shareholders’ equity is a claim against the firm’s ______ that is _____ and not _____.

Answer 14

Shareholders’ equity is a claim against the firm’s assets that is residual and not fixed.

SE = residual difference between assets and liabilities.

Question 15

Assets − Liabilities = ____ _____

Answer 15

Assets − Liabilities = Shareholders’ equity

Question 16

Accounting value of a firm’s assets is frequently referred to as the ______ value or the _____ value of the assets.

Answer 16

Accounting value of a firm’s assets is frequently referred to as the carrying value or the book value of the assets.

Question 17

Market value is the _____ at which willing buyers and sellers ______ the assets.

Answer 17

Market value is the price at which willing buyers and sellers trade the assets.

Question 18

______ − _______ = Income

Answer 18

Revenue − Expenses = Income

Question 19

Statement of comprehensive income measures ________ over a specific period of time (say, a year).

Answer 19

Statement of comprehensive income measures performance over a specific period of time (say, a year).

Like a video recording between two snapshots.

Question 20

Net income is frequently expressed per ___ of ___ ___, that is, as ____ ___ ____.

Answer 20

Net income is frequently expressed per share of common stock, that is, as earnings per share.

Question 21

When analyzing the statement of comprehensive income, the financial manager should keep in mind ____, non-____ items, ___, and ___.

Answer 21

When analyzing the statement of comprehensive income, the financial manager should keep in mind IFRS, non-cash items, time, and costs.

Question 22

Several non-cash items are expenses against revenues but do not affect cash flow directly.

The most important of these are _____ and ______.

Answer 22

Several non-cash items are expenses against revenues but do not affect cash flow directly.

The most important of these are depreciation and amortization.

*Deferred taxes = another non-cash item

Question 23

Depreciation reflects the accountant’s estimate of the ____ of equipment ____ ___ in the ______ process.

Answer 23

Depreciation reflects the accountant’s estimate of the cost of equipment used up in the production process.

Question 24

Amortization is used to reflect the ____ of an intangible asset over its ____ life.

Answer 24

Amortization is used to reflect the cost of an intangible asset over its useful life.

Question 25

Variable costs _____ as the output of the firm changes; some examples are ___ ____ and ____ for production line workers. In the long run, ___ costs are variable.

Answer 25

Variable costs change as the output of the firm changes; some examples are raw materials and wages for production line workers. In the long run, all costs are variable.

Question 26

Current assets - Current liabilities = ____ _____ _____

Answer 26

Current assets - Current liabilities = Net working capital

Question 27

Investment in net working capital occurs when raw materials and other inventory are ______ and _______.

Answer 27

Investment in net working capital occurs when raw materials and other inventory are purchased and stored.

Net working capital decreases when the raw materials are consumed for the manufacture of finished goods.

Question 28

In addition to investing in fixed assets (capital spending), a firm can invest in net working capital—called the _____ in ____ ____ _____.

Answer 28

In addition to investing in fixed assets (capital spending), a firm can invest in net working capital—called the change in net working capital.

Question 29

CF() = CF() + CF(_)

CF(A): Cash flows from the firm’s assets
CF(B): Cash flows to the firm’s creditors
CF(S): Cash flows to equity investors

Answer 29

CF(A) = CF(B) + CF(S)

Cash flows from the firm’s assets, CF(A), must equal the cash flows to the firm’s creditors, CF(B), and equity investors, CF(S):

Question 30

Capital spending = ______ - _______ + ________

Answer 30

Capital spending = Ending long-term assets - Beginning long-term assets + Depreciation

Question 31

Cash flow paid to creditors = _______ - ______

Answer 31

Cash flow paid to creditors = Interest paid - Net new borrowing

Question 32

Net new borrowing = ______

- ________

Answer 32

Net new borrowing = Ending long-term debt

- Beginning long-term debt

Question 33

Cash flow to shareholders = _______ − _______

Answer 33

Cash flow to shareholders = Dividends paid − Net new equity raised

Question 34

Net new equity raised = _______ − _______

Answer 34

Net new equity raised = Shares sold − Shares repurchased

Question 35

Net income is not cash flow. Net income is calculated based on accounting principles that allow ____ and _____ and focus on matching revenues to expenses. Therefore, it is generally preferred to look at ____ ____ over ___ ____, which can be subject to greater manipulation.

Answer 35

Net income is not cash flow. Net income is calculated based on accounting principles that allow accruals and deferrals and focus on matching revenues to expenses. Therefore, it is generally preferred to look at cash flows over net income, which can be subject to greater manipulation.

In determining the economic and financial condition of a firm, cash flow is more revealing.

Question 36

Free cash flow provides insight into a company’s financial ______ and its ability to take advantage of ______ opportunities, and it can even be used in the ____ of companies.

Answer 36

Free cash flow provides insight into a company’s financial flexibility and its ability to take advantage of investment opportunities, and it can even be used in the valuation of companies.

Question 37

Cash flow from assets sometimes goes by a different name: ___ ___ ___.

Answer 37

Cash flow from assets sometimes goes by a different name: free cash flow.

Question 38

Free Cash Flow: cash that the firm is free to distribute to ____ and ______ and is calculated as cash flow from operations less _____ and increase in ___ ____ ____.

Answer 38

Free Cash Flow: cash that the firm is free to distribute to creditors and shareholders and is calculated as cash flow from operations less capital expenditures (CAPEX) and increase in net working capital.

Question 39

Cash flow is generated by the firm and paid to creditors and shareholders. It can be classified as:

Answer 39

Cash flow is generated by the firm and paid to creditors and shareholders. It can be classified as:

a. Cash flow from operations.
b. Cash flow from changes in long-term assets.
c. Cash flow from changes in working capital.

Question 40

There is a cash flow identity that says that cash flow from assets _____ cash flow to bondholders and shareholders.

Answer 40

There is a cash flow identity that says that cash flow from assets equals cash flow to bondholders and shareholders.