S1: Intro To Corporate Finance

Question 1

Corporate Finance

Answer 1

Study to address the 3 questions:
1. What long term investments should a firm take on?
2. How will the firm obtain long term financing to pay for these investments?
3. How will a firm manage every day financial activities?

Question 2

Capital Budgeting

Answer 2

The process of managing long term investments, the value generated should be more than the cost

Question 3

Capital Structure

Answer 3

The mix of borrowing (debt) and ownership interest (equity) offered to raise long term financing to pay for a firm’s assets

Question 4

Working Capital

Answer 4

Management of current assets & liabilities

Question 5

Residual Claim

Answer 5

Right of a party to receive remaining assets or income from a firm after all debts, obligations, and other claims have been settled (in profit distribution or bankruptcy/liquidation event)

Question 6

VP of Finance/CFO

Answer 6

Oversees financial operations and addresses capital budgeting, structure, and working capital

Question 7

Treasurer

Answer 7

Oversees cash and credit management, capital expenditures, and financial planning

Question 8

Controller

Answer 8

Oversees taxes, cost accounting, financial accounting, and data processing

Question 9

Board of Directors

Answer 9

A group of shareholders, or people elected by shareholders, who vote on executive positions and compensation - also oversee firm management

Question 10

Sole Proprietorship

Answer 10

Business owned by a single individual, simple structure with no double taxation but unlimited liability, no existence apart from owner, and difficult to raise capital

Question 11

Partnership

Answer 11

Owned by 2+ individuals, a partnership agreement spells out rights and duties of each partner.

Question 12

General Partners

Answer 12

Similar to sole proprietorship, subject to unlimited liability

Question 13

Limited Partners

Answer 13

Limited Liability, doesn’t participate in day to day of firm

Question 14

Corporation

Answer 14

Distinct legal entity composed of 1+ individuals or entities

Question 15

C Corp

Answer 15

Most publicly traded firms. Must file their corporate charter or articles of incorporation and bylaws that define purpose, rules, and how directors are elected. Limited liability for all owners, unlimited life and transferring of ownership is easy, easy to raise capital, but double taxation occurs

Question 16

S Corp

Answer 16

Limited to 100 US citizens or resident owners without double taxation

Question 17

B Corp

Answer 17

For profit & benefit, must submit special reports

Question 18

Non-Profit

Answer 18

For charitable or educational purposes, not required to pay taxes and can’t distribute dividends

Question 19

Co-Ops

Answer 19

Owned and operated by members who can use the firms services, may vote and receive profit distributions

Question 20

Limited Liability Corporation (LLC)

Answer 20

Hybrid form of a sole proprietorship/partnership but retain limited liability and generally avoid double taxation, recommended for anyone starting a small business

Question 21

Limited Liability Partnership (LLP)

Answer 21

Similar to LLC, but generally reserved for professional services like ACCT and Law - PWC

Question 22

Limited Liability

Answer 22

Only investment in firm, and not personal wealth, can be lost in bankruptcy (promotes risk taking and innovation)

Question 23

Unlimited Liability

Answer 23

Business lenders and individuals can go after your personal wealth if your business cannot pay back debts

Question 24

Double Taxation

Answer 24

The firm, as a separate legal entity, pays taxes while owners are also taxed on dividends the firm pays out

Question 25

Debt Benefits (for person giving $)

Answer 25

$ back + interest

Question 26

Equity Benefits (For person giving $)

Answer 26

Dividends, voting rights, residual claim

Question 27

Goal of Financial MGMT

Answer 27

Max current value per share of existing owners or to max value of firm

Question 28

Stakeholders

Answer 28

Customers, suppliers, employees, society impacted by firm

Question 29

Agency Problem

Answer 29

The possibility of conflict between the owners of a firm (principals) and the mgmt of a firm (agents) - ex: CEO won’t pursue risky opportunity for fear of job loss, or they use the private jet a lot

Question 30

Incentive-Based Compensation

Answer 30

A potential solution to agency problem, if firm does well, so will agents

Question 31

Restricted Stock Units

Answer 31

Exec. agents can receive if their firm’s stock price performs well

Question 32

Executive/Employee Stock Options (ESO)

Answer 32

Allow buying stock at a lower price

Question 33

Monitoring

Answer 33

Another solution for agency problem, SEC mandated disclosures and threat of corporate takeover

Question 34

Primary Market

Answer 34

IPO gives firm $ as it issues shares

Question 35

Secondary Markets

Answer 35

When investors and owners trade share/bonds/debt between each other, firm receives no $, but the value of traded shares establish value of firm

Question 36

Auction Markets

Answer 36

Buyers and sellers of securities match with one another after stating terms (NYSE)

Question 37

Dealer Markets

Answer 37

Dealers buy and sell shares for themselves “over the counter” with other dealers, intending to sell later for profits (NASDAQ)