Week 1

Question 1

What are the three decisions corporate finance represents?

Answer 1

Investment, financing and liquidity

Question 2

What is investment/capital budgeting?

Answer 2

Process of planning and managing a firms long term investment

Question 3

What is financing/capital structure?

Answer 3

Mixture of long term debt and equity maintained by firm

Question 4

Equity finance pros and cons

Answer 4

Pros - no debt repayment

Cons - loss of ownership

Question 5

Debt finance pros and cons

Answer 5

Pros - no loss of ownership

Cons - money must be paid back

Question 6

What is liquidity/working capital management?

Answer 6

Day-by-day activity ensuring that the firm has sufficient resources to continue its operations and avoid costly interruptions

Question 7

What does investment, financing and liquidity do?

Answer 7

Creates value creation and maximises firm value

Question 8

Maximise shareholder wealth/firm value calculation

Answer 8

Share price x number of shares

Question 9

Financial manager responsibilities

Answer 9

Buy assets earning more cash than they cost
Choose long term investments increasing firm value
Maximise value from cash
Raise cheap external financing
Ensure efficient tax policy

Question 10

Financial markets help…

Answer 10

Flow of money from those who have a surplus of money to those who need the money

Question 11

Primary markets

Answer 11

The original sale of securities bought directly from issuer

Question 12

Secondary markets

Answer 12

Securities bought and sold in a stock market after original sale

Question 13

Dealer market

Answer 13

Find agreed price at time

Bank proves bid and offer prices

Question 14

Auction market

Answer 14

If no-one agrees to price, can try again at a later date

Buyers and sellers are matched

Question 15

Forms of business organisation

Answer 15

Sole trader
Partnership
Limited Corporation

Question 16

Corporate governance

Answer 16

How firms manage themselves and how performance is monitored

Question 17

Dispersion of ownership means

Answer 17

Management is effectively in control

Question 18

Agency costs

Answer 18

Costs of resolving problematic agency relationships

Question 19

Agency theory

Answer 19

Have principles (shareholders) who delegate responsibility to agents

Question 20

Agency theory type 1

Answer 20

Relationship between managers and shareholders

Question 21

Agency theory type 2

Answer 21

Relationship between majority and minority shareholders

Question 22

Cumulative voting system

Answer 22

Directors are elected all at once

1/(N+1)% of shares + 1 share will guarantee you a seat

Question 23

Straight voting system

Answer 23

Directors are elected one at a time

The only way to guarantee a seat is to own 50% + 1 share

Question 24

Differences in international corporate governance

Answer 24

Legal systems

Investor protection

Question 25

Typical ownership structures

Answer 25

Widely held firms

Closely held firms

Question 26

Widely held firms

Answer 26

Separation between ownership and control

Agency issues between managers and shareholders

Question 27

Closely held firms

Answer 27

Manager and shareholder incentives aligned

Agency issues between controlling and non-controlling shareholders

Question 28

Types of financial system

Answer 28

Bank based

Market based

Question 29

Bank based

Answer 29

Central to the process of moving funds between demanders and suppliers of capital

Question 30

Market based

Answer 30

Securities markets are as important and can be significantly more important
External market discipline