Topic 1 - Introduction To Corporate Finance

Question 1

What is the primary goal of corporate finance?

Answer 1

To maximize shareholder wealth.

Question 2

What is the agency problem?

Answer 2

A conflict of interest between managers and shareholders.

Question 3

What are the three main decisions in corporate finance?

Answer 3

Investment decision, financing decision, and dividend decision.

Question 4

What is capital budgeting?

Answer 4

The process of planning and managing a firm’s long-term investments.

Question 5

What is the capital structure?

Answer 5

The mix of debt and equity that a firm uses to finance its operations.

Question 6

What is working capital management?

Answer 6

Managing the firm’s short-term assets and liabilities to ensure sufficient liquidity.

Question 7

What is the difference between primary and secondary markets?

Answer 7

In primary markets, new securities are sold to raise capital, while secondary markets trade existing securities.

Question 8

What is the role of a financial manager?

Answer 8

To make decisions that increase the value of the firm to its shareholders.

Question 9

What is the concept of the time value of money?

Answer 9

The principle that money today is worth more than the same amount in the future due to its potential earning capacity.

Question 10

What is a financial intermediary?

Answer 10

Institutions like banks and investment funds that act as middlemen between savers and borrowers.

Question 11

What are the two main forms of equity financing?

Answer 11

Common stock and preferred stock.

Question 12

What are the main types of financial markets?

Answer 12

Money markets and capital markets.

Question 13

What is the difference between debt and equity?

Answer 13

Debt must be repaid, often with interest, while equity represents ownership and does not require repayment.

Question 14

What is the purpose of a stock exchange?

Answer 14

To facilitate the buying and selling of securities.

Question 15

How does a firm add value through financial management?

Answer 15

By making investment and financing decisions that increase cash flows and reduce risk.

Question 16

What is the cost of capital?

Answer 16

The return required by investors given the risk of the investment.

Question 17

What is the efficient market hypothesis?

Answer 17

The theory that stock prices reflect all available information and are therefore accurately priced.

Question 18

What is corporate governance?

Answer 18

The system of rules, practices, and processes by which a company is directed and controlled.

Question 19

What are financial securities?

Answer 19

Tradable financial assets such as bonds, stocks, or derivatives.

Question 20

What is the role of a board of directors in corporate finance?

Answer 20

To oversee management and ensure that the company acts in the best interests of shareholders.

Question 21

What is the difference between a sole proprietorship and a corporation?

Answer 21

A sole proprietorship is owned by one person and has unlimited liability, while a corporation is a separate legal entity with limited liability for its owners.

Question 22

What is the purpose of the financial system in corporate finance?

Answer 22

To channel funds from savers to borrowers, facilitating investment and economic growth.

Question 23

What are dividends?

Answer 23

Payments made to shareholders from the company’s profits.

Question 24

What is the agency cost?

Answer 24

The cost incurred to ensure managers act in the shareholders’ best interest, including monitoring expenses and suboptimal decisions.

Question 25

How can companies mitigate agency problems?

Answer 25

Through performance-based compensation, managerial stock ownership, and the threat of takeovers.

Question 26

What is capital allocation?

Answer 26

The process of distributing financial resources to different investments to maximize returns.

Question 27

What are financial markets?

Answer 27

Platforms where buyers and sellers trade financial securities, such as stocks and bonds.

Question 28

What is corporate social responsibility (CSR) in finance?

Answer 28

The idea that companies should balance profitability with actions that benefit society.

Question 29

What is a leveraged buyout (LBO)?

Answer 29

The acquisition of a company using a significant amount of borrowed money (debt) to meet the cost of acquisition.

Question 30

What is arbitrage?

Answer 30

The simultaneous purchase and sale of an asset to profit from a difference in price across markets.

Question 31

What is a hostile takeover?

Answer 31

An acquisition in which the target company’s management opposes the deal.

Question 32

What is a merger?

Answer 32

The combining of two or more companies into a single entity.

Question 33

What is the role of an investment bank in corporate finance?

Answer 33

To assist companies in raising capital, advising on mergers and acquisitions, and underwriting new stock or bond issues.

Question 34

What is market capitalization?

Answer 34

The total market value of a company’s outstanding shares, calculated by multiplying stock price by the number of shares.

Question 35

How do interest rates affect corporate finance decisions?

Answer 35

Higher interest rates increase the cost of borrowing, making projects less attractive, while lower rates encourage borrowing and investment.