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FUNDAMENTALS OF CORPORATE FINANCE EXAM FULLY SOLVED -1
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FUNDAMENTALS OF CORPORATE FINANCE EXAM FULLY SOLVED -1
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FUNDAMENTALS OF CORPORATE FINANCE EXAM FULLY SOLVED#1
Definition of Corporate Finance - correct answer the study of the relationship between
business decisions and the value of the stock in the business
Capital Budgeting - correct answer the process of planning and managing a firm's long-
term investments
Capital Structure (or Financial Structure) - correct answer the mixture of long-term debt
and equity maintained by a firm to finance its operations
Working Capital - correct answer a firm's short-term assets (ie cash, inventory) and
liabilities (ie accounts payable to suppliers)
What is the capital budgeting decision? - correct answer the acquisition of long-term
investments. The value of the cash flow generated by an asset exceeds the cost of that
asset.
Sole Proprietorship - correct answer business owned by a single individual.
Pros: easy and inexpensive to form, individual retains all profits
Cons: individual has unlimited liability to debt, the organization is limited to the life of the
owner, capital is often limited to owner's personal wealth
Partnership (2 types) - correct answer business formed by 2 or more individuals or
entities.
General: partners receive equal profits and liability
Limited: one or more of the partners will be subject to liability, others will be limited but
not actively involved in management. Division of profits is relative.
Corporation - correct answer business created as a distinct legal entity composed of
one or more individuals or entities; a legal "person" separate and distinct from its
owners; complicated to form, subject to taxes
LLC - correct answer hybrid of partnership and corporation. Operates and taxed like a
partnership but retains limited liability for owners, IRS may double tax if too 'corporation-
like'
Why is the corporate form of business organization superior when it comes to raising
cash? - correct answer ease of transferring ownership, limited liability to debt, unlimited
life of the business
Goal of Financial Management - correct answer to maximize the current value per share
fo the existing stock
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