The Foundations

Question 1

Corporate financial decision

Answer 1

Any decision that involves the use of money

Question 2

Decision

Answer 2

Every decision made in a business has financial implications

Question 3

Firm

Answer 3

refers to any business, large or small, manufacturing or service, private or public.

Question 4

Assets

Answer 4

The firm’s investments are generically termed assets.

Question 5

Assets categorized:

Answer 5

• Fixed assests
• Current assets
• Financial investments
• Intangible assets
• Other assets

Question 6

Fixed assests

Answer 6

Are long-lived real assets

Question 7

Current assets

Answer 7

Are short-lived assets

Question 8

Assets in place

Answer 8

The investments that a firm has already made.

Question 9

Growth assets

Answer 9

Investments that the firms is expected to invest in the future.

Question 10

Yet-to-be-made investments

Answer 10

A firm can get value from investments it has not made yet, high-growth firms get the bulk of their value from these yet-to-be-made investments.

Question 11

How high-growth firms get the bulk of their value?

Answer 11

From Yet-to-be-made investments

Question 12

bulk

Answer 12

large size, mass,

Question 13

Fixed claim

Answer 13

Interest payments

Question 14

How a firm can finance growth assets?

Answer 14

The firm can obtain its capital from two sources. It can rais funds from investors or financial institutions by promising investors a fixed claim on the cash flow generated by the assets, with a limited or no role in the day-to-day running of the business.

Question 15

Residual claim on the cash flow

Answer 15

investors can get what is left over after the interest payments have been made,

Question 16

Debt is …

Answer 16

Debt may take the form of bank loans …

Question 17

Equity is …

Answer 17

Is the owner’s own money

Question 18

Bond

Answer 18

It is a financial product that a firm put in the stock exchange to raise money

Question 19

Financial balance sheet

Answer 19

Assets = Liabilities

Question 20

Assets

Answer 20

Assets in Place + Growth Assets

Question 21

Assets in place:

Answer 21

• existing investments
• generate cash flows today
• includes long-lived (fixed assets)
• short-lived (working capital assets)

Question 22

Growth assets:

Answer 22

Expected value that will be created by future investments

Question 23

Growth assets:

Answer 23

Expected value that will be created by future investments

Question 24

Debt:

Answer 24

• fixed claim on cash flows
• little or no role in management
• fixed maturity
• tax-deductible

Question 25

Equity:

Answer 25

• residual claim on cash flows
• significant role in management
• perpetual lives

Question 26

What are the three fundamental principles that underlie corporate finance?

Answer 26

1- the investment principle
2- the financing principle
3- the dividend principle

Question 27

What does investment principle determine?

Answer 27

It dertermines where businesses invest their recources.

Question 28

What does financing principle govern?

Answer 28

It governs where the mis of funding used to fund these investments.

Question 29

What does dividend principle answer?

Answer 29

It answers the question of how much earnings should be reinvested back into the business and how much should be returned to the owners of the business.

Question 30

What are the core corporate finance principles?

Answer 30

1- the investment principle
2- the financing principle
3- the dividend principle

Question 31

What is corporate finance?

Answer 31

• Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision.
• everything that a business does fits under the rubric of corporate finance.

Question 32

Financial implications

Answer 32

پیامدهای مالی

Question 33

Financial investments

Answer 33

Investments in securities & assets of other firms

Question 34

Intangible assets

Answer 34

Assets which are not physical, like patents & trademarks

Question 35

Liabilities

Answer 35

• Current liabilities
• Debt
• Other liabilities
• Equity

Question 36

Current liabilities:

Answer 36

Short-term liabilities of the firm

Question 37

Debt:

Answer 37

Debt obligation of firm

Question 38

Other liabilities:

Answer 38

Othere long-term obligations

Question 39

Equity:

Answer 39

Equity investment in firm

Question 40

Liability:

Answer 40

• مسئولیت

- بدهی

Question 41

Assets in Financial Balance sheet:

Answer 41

• what the firm has invested till now

- what the firm is going to invest

Question 42

Liabilities in Financial Balance sheet:

Answer 42

• you can borrow the money ( Debt )

- you use your own money ( Equity)

Question 43

Debt

Answer 43

to borrow the money

Question 44

Equity

Answer 44

to use your own money

Question 45

Equity

Answer 45

to use your own money

Question 46

There are only 2 ways you can fund a business:

Answer 46

• you can borrow the money ( debt )

- you can use your own money ( equity )

Question 47

who gets money frist?

Answer 47

when you make money each year the Debt holders get paid first !

Question 48

Debt holders:

Answer 48

they have very little management control of the company and if the company goes bankcruptcy they get first claim on the assets !

Question 49

Equity holders:

Answer 49

Equity gets whatever leftover, and they run the company

Question 50

what does investment principle tell?

Answer 50

when you as a business, go out and make investments ( in projects or assets ) make sure you earn a return on those investments that exceeds some minimum acceptable hurdle rate.

Question 51

The investment decision:

Answer 51

invest in assets that earn a return greater than the minimum acceptable hurdle rate

Question 52

Hurdle rate

Answer 52

• minimum rate in order to get money ( growth rate )
• In capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in a project. Hence the hurdle rate is also referred to as the company’s required rate of return or target rate. In order for a project to be accepted, its internal rate of return must equal or exceed the hurdle rate.