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FUNDAMENTALS OF CORPORATE FINANCE 13TH EDITION - CHAPTER 1+2 EXAM SOLVED -12
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FUNDAMENTALS OF CORPORATE FINANCE 13TH EDITION - CHAPTER 1+2 EXAM SOLVED -12
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FUNDAMENTALS OF CORPORATE FINANCE 13TH EDITION -CHAPTER 1+2 EXAM SOLVED #12
Finance: The Five Main Areas - correct answer 1. Corporate finance
2. Investments
3. Financial institutions
4. International finance
5. Fintech
Capital Budgeting - correct answer The process of planning and managing a firm's long-
term investments.
In capital budgeting, the financial manager tries to identify investment opportunities that
are worth more to the firm than they cost to acquire. Loosely speaking, this means that
the value of the cash flow generated by an asset exceeds the cost of that asset.
Capital Structure - correct answer The mixture of debt and equity maintained by a firm.
A firm's capital structure (or financial structure) is the specific mixture of long-term debt
and equity the firm uses to finance its operations.
The financial manager has two concerns in this area. First, how much should the firm
borrow? That is, what mixture of debt and equity is best? The mixture chosen will affect
both the risk and the value of the firm. Second, what are the least expensive sources of
funds for the firm?
Working Capital - correct answer A firm's short-term assets and liabilities.
The term working capital refers to a firm's short-term assets, such as inventory, and its
short-term liabilities, such as money owed to suppliers. Managing the firm's working
capital is a day-to-day activity that ensures that the firm has sufficient resources to
continue its operations and avoid costly interruptions. This involves a number of
activities related to the firm's receipt and disbursement of cash.
Some questions about working capital that must be answered are the following: (1) How
much cash and inventory should we keep on hand? (2) Should we sell on credit? If so,
what terms will we offer, and to whom will we extend them? (3) How will we obtain any
needed short-term financing? Will we purchase on credit, or will we borrow in the short
term and pay cash? If we borrow in the short term, how and where should we do it?
These are just a small sample of the issues that arise in managing a firm's working
capital.
Why is the corporate form superior when it comes to raising cash? - correct answer The
relative ease of transferring ownership, the limited liability for business debts, and the
unlimited life of the business are why the corporate form is superior for raising cash.
, If a corporation needs new equity, for example, it can sell new shares of stock and
attract new investors. Apple is an example. The company was a pioneer in the personal
computer business. As demand for its products exploded, it had to convert to the
corporate form of organization to raise the capital needed to fund growth and new
product development. The number of owners can be huge; larger corporations have
many thousands or even millions of stockholders. For example, in 2020, General
Electric Company (better known as GE) had about 440,000 stockholders and about 8.7
billion shares outstanding. In such cases, ownership can change continuously without
affecting the continuity of the business
What is the difference between a general and a limited partnership? - correct answer In
a general partnership, all the partners share in gains or losses, and all have unlimited
liability for all partnership debts, not just some particular share. The way partnership
gains (and losses) are divided is described in the partnership agreement.
In a limited partnership, one or more general partners will run the business and have
unlimited liability, but there will be one or more limited partners who will not actively
participate in the business. A limited partner's liability for business debts is limited to the
amount that partner contributes to the partnership.
Sole Proprietorship - correct answer A business owned by one person. This is the
simplest type of business to start and is the least regulated form of organization.
Depending on where you live, you might be able to start a proprietorship by doing little
more than getting a business license and opening your doors. For this reason, there are
more proprietorships than any other type of business, and many businesses that later
become large corporations start out as small proprietorships.
What are the advantages / disadvantages of a Sole Proprietorship? - correct answer
Advantages:
• Simplest to start
• Least regulated
• Owner keeps all the profits
Disadvantages:
• All business income is taxed as personal income
• Amount of equity that can be raised is limited to the amount
Of the proprietor's personal wealth
• Owner has unlimited liability for business debts
• Life of sole proprietorship is limited to owner's life span
• Ownership may be difficult to transfer
Partnership - correct answer A partnership is a business formed by two or more
individuals or
Entities. There are two types of partnerships:
• General partnership
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