Module 1: Introduction to Corporate Finance

Question 1

What are the 6 basic areas of finance?

Answer 1

1. Corporate Finance
2. Investments
3. Financial Institutions
4. International Finance
5. Fintech
6. Personal Finance

Question 1

applying technology to financial problems; ex: using an app to manage your money

Answer 1

Fintech

Question 2

What is the goal of finance?

Answer 2

Relative Valuation (what do things cost?)

Question 3

Things that are the same should be the same price. But, they can have different prices when they have different features (ex: Lambo vs. Camry). This is the ______ _____ _____ ______.

Answer 3

Law of One Price

Question 4

Corporate finance focuses on what 3 questions?

Answer 4

1. What should we invest in?
2. How do we finance those investments?
3. How do we manage the day-to-day operations of the firm?

Question 5

What are the 2 complications that commonly occur in corporate finance situations?

Answer 5

1. Risk
2. Timing of the Cash-Flows

Question 6

T or F: We assume investors are risk averse (avoid risk).

T or F: Over long periods of time, inflation makes a big difference (issue of inflation).

Answer 6

True; True

Question 7

What is the downside of the Balance Sheet Model?

Answer 7

It only tells us what business has done in the past; the other two models show us what business hopes to generate in the future

Question 8

T or F: The Market Value Model is pretty reliable.

Answer 8

True

Question 9

the process of managing a firm’s long-term investment

Answer 9

capital budgeting

Question 10

the mixture of financing types that a company uses to fund its long-term investments (how we’re financing the projects that we want to finance)

Answer 10

capital structure

Question 11

Does capital structure matter (aka does it matter if we get the money from stocks (equity) or liabilities (debt)/ where the money comes from)?

Answer 11

Not if there’s an efficient market with no taxes, no bankruptcy cost, and no agency costs and asymmetric information

Question 12

where one side has more information about the project than the other side (ex: bank vs. you knowing how hard you’re going to work on a project)

Answer 12

asymmetric information

Question 13

Which describes debt and which describes equity?
1. No guarantee of any particular cash flows; more upside but less downside protection
2. Money we’ve borrowed and promise to pay back

Answer 13

Equity; debt

Question 14

You don’t want to have too much cash on hand because those assets are not being _______. The investors that have given you money want to be able to earn a ______, so they want you to be putting that money to good use.

Answer 14

productive; return

Question 15

where investors are buying and selling stocks, funds, etc.

Answer 15

financial markets

Question 16

when a company is raising money directly. These are one time events for the most part.

Answer 16

Primary market transaction

Question 17

where securities are traded after they go through the primary market

Answer 17

secondary market (ex: buying stock for Starbucks. Money doesn’t go directly to Starbucks, it goes to the previous investor)

Question 18

Which market is good for companies that are trying to raise money because investors are willing to pay a lot more for a public company because they know that they can get out of their investment at any time?

Answer 18

Secondary markert

Question 19

What are the 2 basic things companies can do with the cash flowing out of their firms?

Answer 19

1. Reinvest the money back into the company
2. They can pay it out to shareholders
   (part of the profits will also go to government for taxes)

Question 20

In the case of ____, companies are obligated to pay money out to shareholders. If it’s ______, the company doesn’t have an obligation to pay out dividends.

Answer 20

debt; equity

Question 21

Historically, shareholders were paid with __________. Nowadays, it’s more popular for companies to pay shareholders by doing ______ ________.

Answer 21

dividends; share buybacks

Question 22

T or F: all investors have to pay taxes on dividends and dividends are declared quarterly

Answer 22

True

Question 23

When companies go into the open market and buy back shares. As they buy more and more shares, the value of the shares that are left start to go up. Companies like to do this rather than pay out dividends for ______ reasons.

Answer 23

share buybacks ; tax

Question 24

Who gets paid first: debtholders or shareholders?

Answer 24

Debtholders

Question 25

T or F: Equity is a promised stream of cash flows. Debt gets whatever is left over.

Answer 25

False; debt, then equity

Question 26

T or F: Equity holders have no downside protection, but they also have the opportunity for an unlimited upside.

Answer 26

True

Question 27

A business created as a distinct legal entity composed of one or more individual entities.

Answer 27

corporation

Question 28

What is the goal of the firm?
Why is this a good goal? Bad?

Answer 28

• To maximize the current value per share of the existing stock.
• Good: we want owners to be happy because they risk their capital to give to the company.
• Bad: Investors could be too short-term sighted and it’s too narrow (like what abt treating employees well, focusing on the quality of the product, etc.)

Question 29

What are the 2 costs of the conflicts of interest between stockholders and management?

Answer 29

1. Direct costs
2. Indirect costs

Question 30

Corporate expenditures that benefit management but not shareholders.

Answer 30

Direct costs

Question 31

building a nice, new office that makes the CEO/management team happy, but doesn’t add any value to the company is an example of a _____ _______.

Answer 31

direct cost

Question 32

Direct costs are expenses that arise from the _______ ___ _____ management actions.

Answer 32

need to monitor

Question 33

Lost opportunities, that managers may not pursue if there is significant risk is a _______ _______.

Answer 33

indirect cost