Principles of Corporate Finance Exam Questions With Verified Answers || Graded A+

Principles of Corporate Finance Exam Questions With Verified Answers || Graded A+ Enterprise value multiples - ANSWER Enterprise value multiples use a measure of earnings before interest payments are made • EBIT • EBITDA • Free cash flow - Because capital expenditures can vary between years, most common is to use enterprise value to EBITDA multiples compute payout rate - ANSWER compute retention rate - ANSWER compute growth rate (if return on investment is known) - ANSWER total risk - ANSWER systematic risk - ANSWER -detemines expected returns =can measure using beta unsystematic risk - ANSWER -can diversify to get rid of compute portfolio variance - ANSWER compute portfolio standard deviation - ANSWER market value of a firm - ANSWER number of shares outstanding X price per share cost of equity (using CAPM) - ANSWER expected return risk free rate + risk premium for systematic risk rfr+ B(mrp) dividend/current price + dividend growth rate compute value weighted return - ANSWER compute beta - ANSWER WACC - ANSWER weighted average overall cost of captial -unlevered -levered effective cost of debt - ANSWER rd(1-Tc) tc=corporate tax rate cost of preferred stick capital - ANSWER preferred dividend / preferred stock price long term investments - ANSWER capital budgeting decisions sources of financing (debit vs. equity) for long term investments - ANSWER capital structure decisions short-term assets & liabilities - ANSWER working capital decisions sole proprietorship, partnership, corporation - ANSWER forms of an organization one owner, easy to form personal tax, pay back debts of business,time for the business is limited, hard to raise money - ANSWER sole proprietorship two or more owners, easy/inexpensive to form, personal taxes, limited life, hard to raise money - ANSWER partnership one or more owners, complicated/expensive to form, corporate and personal taxes, unlimited life - ANSWER corporation maximize the market value of the existing owners equity - ANSWER general goal maximize the market value per share of common stock - ANSWER corporate goal exists whenever one party ("principal") hires another ("agent") to represent the interest of the principal - ANSWER agency relationship a conflict of interest between the principal & the agent - ANSWER agency problem structure compensation to align management and stockholders goals. Ex. stock options, profitability bonuses, ect. - ANSWER managerial compensation proxy fights (by the stakeholders), corporate takeovers, - ANSWER control of the firm markets that bring together buyers& sellers of debt & equity securities. ex. primary and secondary - ANSWER Financial market seller- the corporation buyer- general public (public offering) specific party ( private placement ) effect- raise money foe the issuing corporation - ANSWER primary market seller- an owner or creditor. buyer- another owner effect of secondary market transactions, transfer ownership of corporate securities. effect- transfer ownership of corporate securities - ANSWER secondary market usually no physical location, dealers buy and sell for themselves, at their own risk - ANSWER over-the-counter (dealer) market physical locations (wall street) , brokers match buyers and sellers - ANSWER auction markets short term, long term, asset utilization, profitability ROE= (profit margin x total asset turnover x equity multiplier) - ANSWER DuPont identity for every dollar of the denominator, you have the answer of the problem of the numerator - ANSWER formulas additional retained earnings/net income - ANSWER b equity/shares outstanding - ANSWER book value maximum rate a company can grow if the only use retained earnings - ANSWER internal growth rate maximum rate a company can grow if the use retained earnings plus borrow - ANSWER sustainable growth rate cash flow from assets = cash flow to creditors + cash flow to the stockholders - ANSWER cash flow marginal tax rate / taxable income - ANSWER average tax rate the speed & ease with which an asset can be converted to cash without a significant loss of value - ANSWER liquidity shows revenue when it accrues & matches expenses to that revenue - ANSWER Gaap (Generally Accepted Accounting Principles) limited liability - ANSWER the shareholders in a company cannot be held personally responsible for the debts of that business Agency costs - ANSWER Are incurred when 1) managers do not attempt to maximize firm value and 2) shareholders incur costs to monitor the managers and constrain their actions . Real Assets - ANSWER Tangible and intangible assets used to carry on buisness. Financial assets/ Securities - ANSWER The corporation pays for the real assets by selling claims on them and on the cash flow that they will generate. EX: Bank loan, corporate bond investment decision - ANSWER Purchase of real assets financing decison = sale of financial assets the decision to build, buy, or lease plants and equipment; to enter or exit an industry Financing Decision - ANSWER Sale of financial assets Decision on the sources and amounts of financing Capital Budgeting - ANSWER the process of planning and managing a firm's long-term investments capital expenditures - ANSWER Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights. capital structure decision - ANSWER The choice between debt and equity financing Capital refers to the firm's sources of long-term financing. unlimited liability - ANSWER The owner is personally and fully responsible for all losses and debts of the business compound interest - ANSWER interest earned on both the principal amount and any interest already earned Present Value - ANSWER the discounted value at the present time of a sum of money to be received in the future discount factor - ANSWER Measures the present value of one dollar received in year t Net Present Value (NPV) - ANSWER Discounted Cash Flow (DCF) - ANSWER Perpetuities - ANSWER Annuity date - ANSWER A level stream of payments starting immediately An annuity date is worth (1+r) times the value of an ordinary annuity Amortizing loans - ANSWER Loans that involve a series of level payments ask price - ANSWER the price at which a dealer or other trader will sell a security bid price - ANSWER the price a dealer is willing to pay for a security bid-ask spread - ANSWER the difference between the bid price and the asked price Hurdle Rate - ANSWER Minimum acceptable rate of return (set by management) for an investment. Balance Sheet, and the Balance Sheet formula - ANSWER snapshot of firm's assets/liabilities at given point in time The formula: Assets- Liabilities + Stockholders' Equity Which one of the following is classified as a tangible fixed asset? - ANSWER Production Equipment What are the 3 most important things to keep in mind when examining the balance sheet? slide 8 the six boxes - ANSWER liquidity, debt vs. equity, market value vs. book value. Working capital management, capital structure, capital budgeting Net Working Capital definition - ANSWER positive when cash will be received over next 12 months exceeds cash that will be paid out usually positive in a healthy firm Net Working Capital Formula - ANSWER NWC= Current Assets- Current Liabilities Liquidity - ANSWER ability to convert to cash quickly without a significant loss in value What's the trade off between liquid and illiquid assets? - ANSWER liquid firms are less likely to experience financial distress But liquid assets typically earn lower return Debt vs Equity - ANSWER firm default: creditors paid first; shareholders get residual What's the other term for debt, and what does it do? - ANSWER Other term is Financial leverage, increases potential reward to shareholders that also increases chance of financial distress