Topic 1 - Introduction To Corporate Finance Flashcards

1
Q

What is the primary goal of corporate finance?

A

To maximize shareholder wealth.

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2
Q

What is the agency problem?

A

A conflict of interest between managers and shareholders.

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3
Q

What are the three main decisions in corporate finance?

A

Investment decision, financing decision, and dividend decision.

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4
Q

What is capital budgeting?

A

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

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5
Q

What is the capital structure?

A

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

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6
Q

What is working capital management?

A

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

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7
Q

What is the difference between primary and secondary markets?

A

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

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8
Q

What is the role of a financial manager?

A

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

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9
Q

What is the concept of the time value of money?

A

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

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10
Q

What is a financial intermediary?

A

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

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11
Q

What are the two main forms of equity financing?

A

Common stock and preferred stock.

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12
Q

What are the main types of financial markets?

A

Money markets and capital markets.

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13
Q

What is the difference between debt and equity?

A

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

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14
Q

What is the purpose of a stock exchange?

A

To facilitate the buying and selling of securities.

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15
Q

How does a firm add value through financial management?

A

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

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16
Q

What is the cost of capital?

A

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

17
Q

What is the efficient market hypothesis?

A

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

18
Q

What is corporate governance?

A

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

19
Q

What are financial securities?

A

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

20
Q

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

A

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

21
Q

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

A

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.

22
Q

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

A

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

23
Q

What are dividends?

A

Payments made to shareholders from the company’s profits.

24
Q

What is the agency cost?

A

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

25
Q

How can companies mitigate agency problems?

A

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

26
Q

What is capital allocation?

A

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

27
Q

What are financial markets?

A

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

28
Q

What is corporate social responsibility (CSR) in finance?

A

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

29
Q

What is a leveraged buyout (LBO)?

A

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

30
Q

What is arbitrage?

A

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

31
Q

What is a hostile takeover?

A

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

32
Q

What is a merger?

A

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

33
Q

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

A

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

34
Q

What is market capitalization?

A

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

35
Q

How do interest rates affect corporate finance decisions?

A

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