Session 1- Intro to Corporate Finance

Question 1

What 3 questions do Coporate Finance address?

Answer 1

1. What long-term assets should the business invest in?
2. How can the business raise cash for capital expenditures?
3. How should short-term operating cash flows be managed?

Question 2

What is WACC?

Answer 2

Weighted Avg Cost of Capital

Question 3

What is the Financial Manager’s primary goal?

Answer 3

Their PRIMARY goal is to increase the value of the firm by
1. Selecting value-creating projects
2. Making smart financing decisions

Question 4

What is the corporate form of business

Answer 4

The standard method for solving the problems encountered in raising large amts of cash

Question 5

What is one of the differences between corporations and partnerships (In terms of Liquidity

Answer 5

Liquidity- In corporations, shares can be easily exchanged whilst partnerships are subjected to restrictions

Question 6

How do we maximize shareholder wealth?

Answer 6

Through value creation

Question 7

What is one of the differences between corporations and partnerships (In terms of Voting Rights)

Answer 7

In corporations, each share gets one vote whilst in partnerships the general partner is in charge (other partners have SOME voting rights)

Question 8

What is another name for principal/owner?

Answer 8

Shareholder

Question 9

What is the Agency Relationship?

Answer 9

Principal hires an agent to represent their interest
*Stakeholders (principals) hire managers (agents) to run the business

Question 10

What is one of the differences between corporations and partnerships (In terms of Taxation)

Answer 10

Corporations are subjected to double taxation ie. Income tax and corporation taxes because they are seen as two separate entities (unlike sole traders, partnerships, etc)
On the other hand, partners only pay personal taxes on their partnership profits

Question 11

What is one of the differences between corporations and partnerships (In terms of Liability)

Answer 11

Corporations and limited partners have limited liability whilst General partners have unlimited liability. Limited liability means that should the business go bankrupt, limited partners and shareholders are only subject to lose their business assets not their personal belongings as the company stands as a separate entity

Question 12

What is one of the differences between corporations and partnerships (In terms of Continuity)

Answer 12

Corps- Perpetual Life
Partnerships limited life ie when partners die the business ceases to exist

Question 13

Who is going to get an A on this exam?

Answer 13

Tenika Taylor purr (it is already mine)

Question 14

What are some forms of business?

Answer 14

1. Sole proprietorship
2. Partnerships (Limited and General)
3. Corporations

Question 15

What are financial securities? List some examples.

Answer 15

Financial securities are tradeable financial instruments used to generate profit and/or obtain capital. It holds monetary value and can be traded between two parties. Egs. stocks, bonds, T-bills

Question 16

How to deal with the agency problem?

Answer 16

1. Managerial compensation
   °Incentives can be used to align mgmt and stockholder interests
   °The incentives need to be structured carefully to make sure that they achieve their intended goal

These incentives or strategies include
Pay for Performance Relation:
One approach to align the interests of shareholders with those of managers is by linking compensation to firm performance. This is known as the “pay for performance” relation. Employee KPIs

Equity-Based Compensation:
Equity-based managerial compensation, such as stock options or restricted stock, can help address the agency problem.When managers hold equity in the company, their interests become more aligned with shareholders. They benefit when the company performs well.Research has shown a positive pay-for-performance relation between equity-based compensation and performance measures like Return on Assets (ROA) and Tobin’s Q1.

Transparency and Restrictions:
To mitigate the agency problem, consider the following strategies:Full Transparency:Ensure transparency in compensation structures. Shareholders and stakeholders should understand how managerial compensation is determined.Restrictions on Managerial Capabilities:Place limits on managerial discretion to prevent self-serving behavior.Tie Compensation to Principal’s Well-Being:Align compensation with the overall well-being of the company and its shareholders.

2. Corporate control
   °The threat of a takeover may result in better mgmt

Question 17

What major regulations impact public firms?

Answer 17

The Securities Act of 1933 and the Securities Exchange Act of 1934
°Insurance of Securites (1933)
° Creation of SEC and reporting requirements (1934) Sarbanes-Oxley (“Sarbox”)
°Increased reporting requirements and responsibility of corporate directors