Corporate Finance Exam Bundle (Complete Solutions)

Three aspects of corporate finance - ANSWER-1. Capital Budgeting 2. Capital Structure 3. Working capital Management Capital Budgeting - ANSWER-planning and managing the firm's long term investments capital structure - ANSWER-how to finance investments - optimal mix of debt to equity Wor...

Corporate Finance - ANSWER-1. What long-term investments should you take? That is what lines of business will you be in, and what sorts of buildings, machinery and equipment will you need? 2. Where will you get the long-term financing to pay for your investment? Will you bring in other owners, or...

Future Value (FV) - ANSWER-refers to the amount of money an investment will grow to over some period of time at some given interest rate. The cash value of an investment at some time in the future. If you invest $100 in a savings account that pays 10 percent interest per year find future value - ...

Capital Budgeting - ANSWER-The process of planning and managing a firms long term investments. Capital Structure - ANSWER-The mixture of debt and equity maintained by a firm. Working Capital - ANSWER-A firms short term assets and liabilities. Sole Proprietorship - ANSWER-A business owned by...

According to Modigliani and Miller Proposition II, the firm's expected return on assets depends on several factors including the firm's capital structure. T or F - ANSWER-FALSE According to Modigliani and Miller Proposition II, since the expected rate of return on debt is less than the expected...

Sources of cash - ANSWER-a firm's activities that generate cash Uses of cash - ANSWER-a firm's activities in which cash is spent Statement of cash flows - ANSWER-a firm's financial statement that summarizes its sources and uses of cash over a specified period of time Common Size Statemen...

Which one of the following is correct in relation to pro forma statements? a. Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity b. Long-term debt varies directly with sales when a firm is currently operating at maximum capacity...

Balance Sheet - ANSWER-financial statement showing firm's accounting value on particular date Net Working Capital (NWC) - ANSWER-the difference between a firm's current assets and current liabilities Financial Leverage - ANSWER-use of debt in a firm's capital structure, this increases as de...

capital budgeting process - ANSWER-the process of identifying and evaluating capital projects (projects where the cash flow to the firm will be received over a period longer than one year) 4 administrative steps of capital budgeting process - ANSWER-1. idea generation 2. analyzing project propos...

Depreciation has no impact on Incremental Free Cash Flow because it is a cost, but not a cash outlay. (t/f) - ANSWER-False Cannibalism can be described as losing relevant cash flows because a competitor introduces a new product. (t/f) - ANSWER-False The market in which a firm operates has beco...

cash dividend - ANSWER-payment of cash by the firm to its stockholders ex-dividend date - ANSWER-date that determines whether a stockholder is entitled to a dividend payment - anyone holding a stock before this date is entitled - dictated by stock exchange rules and is usually set to be two bu...

Accrual-based Approach - ANSWER-The revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash Cash Flow Approach - ANSWER-Used by financial professionals to focus attention on current and prospective inflows and outflows of ...

Capital Budgeting - ANSWER-the process of planning and managing a firm's long-term investments (accepting or rejecting projects). Net Present Value - ANSWER-The difference between the sum of the present values of a project's future cash flows and the initial cost of the project. Accept a Pro...

Exam 1: Regarding market value ratios, which of the following is not correct? - ANSWER-D. High risk of expected growth in earnings leads to an increase in market value ratios. Exam 1: If legislation is passed requiring companies to depreciate its equipment over a shorter time period, what would h...

Suppose you invest $1,000 for one year at 5% per year. What is the future value in one year? - ANSWER-- Looking for FV FV = PV (1+r)^t - for excel function make sure PV is negative Future value interest factor - ANSWER-(1+r)^t Let us assume that you need $10,000 in one (1) year for a down pa...

Generally, if you had to select one, what is the best capital budgeting technique? - ANSWER-Net present value ( NPV) Generally, if you had to select one, what is the worst capital budgeting technique? - ANSWER-Payback Period Will Payback Period and Net Present Value (NPV) always support the sa...

capital budgeting - ANSWER-the process of planning for purchases of assets whose returns are expected to continue beyond one year capital expenditure - ANSWER-a cash outlay that is expected to generate a flow of future cash benefits lasting longer than one year capital expenditures - ANSWER-us...

The Sarbanes-Oxley Act of 2002 was passed in response to A) the agency issue B) false disclosures in financial reporting C) insider trading activities D) the decline in technology stocks - ANSWER-B) false disclosures in financial reporting A financial manager must choose between four alternativ...

Categories of Capital Budgeting Projects - ANSWER-Replacement projects to maintain business (normally done without much analysis) Replacement projects for cost reduction (fairly detailed analysis required) Expansion projects (complex decision making process) New product/market development Mandat...

capital budgeting - ANSWER-the process of planning and managing a firm's long term investments Role of Finance - ANSWER-1) Manage Cash--> management of daily activities 2) What projects should we take on (investments) -how should we finance them? Owners=Managers? - ANSWER-Owners are the...

The primary goal of a Financial Manager is to: A) Decrease the shareholder value of the firm. B) Increase the market potential of the firm. C) Assess and evaluate the market potential of the firm. D) Increase shareholder value of the firm by selecting value creating projects. E) None of th...

sole proprietorship - ANSWER-1 owner, owner receives all the profits, unlimited liab., 2 parts: 1. initial investment and 2. personal wealth. Taxed based on personal income. Transfer of ownership is hard. Must be willing to buy all assets. partnership - ANSWER-2 or more owners. profit is based on...

net working capital - ANSWER-current assets - current liabilities marginal tax rate - ANSWER-tax rate for the next dollar that we make effective tax rate - ANSWER-total tax/net profit before taxes. shows the overall tax rate market value - ANSWER-the value of the firm or other asset on the ...

Five Key Principals of Capital Budgeting - ANSWER-1) Decisions are based on incremental cash flows. Sunk costs are not considered. 2) Cash flows are based on opportunity cost 3) Timing of the cash flows is important 4) Cash flows are analyzed on an after-tax basis 5) Financing costs are reflecte...

Shareholders' equity: - ANSWER-Represents the residual value of a firm. Which one of the following terms is defined as the management of a firm's long-term investments? - ANSWER-Capital budgeting. Lenders probably have the most interest in which one of the following sets of ratios? - ANSWER-...

What is a sole proprietorship? - ANSWER-Relatively easy to set up and well suited for small businesses. No distinction between owner and manager which means unlimited liability What is a partnership? - ANSWER-Share obligations and profits among partners. Still at risk for unlimited liability. ...

When a bond matures, the issuer repays the bond's face value; True False - ANSWER-True (full face value) The coupon rate of a bond equals: A. The yield to maturity when the bonds sells at a discount B. A defined percentage of its face value C. Its yield to maturity D. The annual inte...

Which of the following statements regarding a sole proprietorship is false? a) Sources of funds for a sole proprietorship typically include personal savings, as well as raising funds from a bank or personal loans from friends and family. b) Sole proprietorship are easy to set up with almost no pap...

The process of planning and managing a firm's long-term investments is called: A. working capital management. B. financial depreciation. C. agency cost analysis. D. capital budgeting. E. capital structure. - ANSWER-capital budgeting. The mixture of debt and equity used by a firm to f...

Working Capital= Current Assets + Current Liabilities - ANSWER-What is the equation for Working Capital? Prime Rate - ANSWER-The lowest rate a bank will charge its best customer What we own - ANSWER-Assets are ... How we finance what we own - ANSWER-Liabilities are... Snapshot picture of...

Capital Budgeting Process - ANSWER-Identifying & evaluating firm capital projects where cash flow to the firm will be received over a period longer than 1 year Categories of Capital Budgeting Projects - ANSWER-1. Replacement Projects to Maintain the Business: made without detailed analysis, shoul...

What number on the BS will generally equal a firms net worth? - ANSWER-Shareholder equity= Assets - liabilities Basic Balance sheet equation - ANSWER-Assets= liabilities + shareholder equity What do the asset values shown on the BS reflect? - ANSWER-Book Value—the historical price ar which t...

Capital Investment - ANSWER-The funds invested in a firm or enterprise for the purpose of furthering its business objectives. Payback Period - ANSWER-The length of time required to recover the cost of an investment. Discounted Break-even - ANSWER-The number of years it takes to break even from...

The liability of sole proprietors is limited to the amount of their investment in the company. - ANSWER-FALSE - The liability of sole proprietors is unlimited General partners have limited personal liability for business debts in a limited partnership. - ANSWER-FALSE - General partners have unlim...

financial markets - ANSWER-Are simply ways of connecting providers of cash with users of cash. Three main forms of business organization are the - ANSWER-proprietorship, partnership, corporation Going public - ANSWER-Is also called initial public offering (IPO) because it is the firsts time th...

Which of the following is least likely classified as a takeover defense? Golden parachutes. Cumulative voting. Poison pills Greenmail. - ANSWER-Cumulative voting. Which of the following might be an undesirable trait of a member of the board of directors? Experience with the technologies, pro...

An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of $150,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $700,000 with a 7% annual coupon. The applicable tax rate is 35%. What is the value of the levered f...

RISK. Degree of Operating Leverage - ANSWER-=(P-v)Q/(P-v)Q-fixed cost =Sales-v/Sales-Total Operating Cost (EBIT) =1+(fixed cost/profit) Net Cash Flow Formula (NCF) - ANSWER-=(R-Vc-Fc-D)x(1-t)+D Revised Income Statement - ANSWER-Sales-Total Operating Cost=EBIT-interest=EBT-taxes=EAT-Dividen...

Corporate Finance Circular Flow Model - ANSWER-1-Financing decision: -->Debt or Equity? 2-Investment decision: -->What assets should we purchase? 3-Operating decision: -->How should we use assets to generate cash? 4-Payout decision: -->Should we distribute cash flows to shar...

Debt, equity - ANSWER-The value of a firm is defined to be the sum of the value of the firm's ______ and the firm's ______. Homogeneous expectations Homogeneous business risk classes Perpetual cash flows Perfect Capital markets - ANSWER-Assumptions of the M&M Model capital structure - ANS...

Disadvantages of too little leverage - ANSWER-lost tax benefits, excessive perks, wasteful investment, empire building What is empire building? - ANSWER-when a CEO purchases additional assets to increase their personal compensation and power rather than benefit the company Disadvantages of too...

What is the NPV rule? - ANSWER-When making an investment decision, take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. What is the intuition behind the payback rule? What are some of its drawbacks? - ANSWER-When making an investme...

Which one is WRONG? (a) Corporate finance in general answers 'what projects are beneficial to the firm and how the firm should get the money to do them' (b) Capital Budgeting answers 'which projects are beneficial to the firm and are worth investing in' (c) Capital Structure answers 'How the...

Is there a clever way to finance firm that increase firm value? - ANSWER-MM capital structure irrelevance theorem states that it is only the expected CFs and risk of the project that determine firm value - capital structure is irrelevant MM Proposition I assumption - ANSWER-Firm's CFs are unaffe...

Which question does the investment decision (capital budgeting/CAPEX) attempt to answer? - ANSWER-What investments should the business take on? Which questions does the financing (and dividend) decision (capital structure) attempt to answer? - ANSWER-How can finance be obtained to pay for the req...

Agency problem - ANSWER-When managers see no incentive to work towards the wills of the shareholders when that means working against their own self-interest Corporation - ANSWER-A judicial person separate from its owners - it can enter into contracts and own property Limited partnership - ANSW...

1.1 How do you understand the following statement: "Corporate Finance is focused". - ANSWER-Goals of the Corporation: Shareholders desired wealth maximization. 1.2 Who are the principal financial managers in a corporation? Write down their main responsibilities. - ANSWER-Chief Financial Officer...

What are the parts of the cash flow statement? - ANSWER--Cash flow from Operating Activities -Cash flow from Investing Activities -Cash flow from Financing Activities What are cash inflows from financing activities? - ANSWER--debt issuance, common stock, preferred stock What are cash outflow...

CFO - ANSWER-the top financial manager within a firm Treasurer - ANSWER-Oversees cash management, credit management, capital expenditures, and financial planning Controller - ANSWER-Oversees taxes, cost accounting, financial accounting and data processing Financial Management Decisions - AN...

holders of debt securities typically are rewarded by receiving interest on the funds loaned to a firm, and by sharing in the increased wealth of the firm as the firm profits - ANSWER-False the primary market for a security is one where the original offering of the firm's financial assets takes p...

T/F: Modigliani and Miller published theoretical papers that changed the way people thought about financial leverage - ANSWER-True What assumptions underlie the MM and Miller Models? - ANSWER-+Firms can be grouped into homogeneous classes based on business risk. +Investors have identical expe...

Working capital management includes which one... A. Deciding which new projects to accept B. Deciding whether to purchase a new machine or fix a currently owned machine C. Determining which customers will be granted credit D. Determining how many new shares of stock should be issued E. Establ...

What is corporate finance? - ANSWER-To carry on business, corporations need an almost endless variety of real assets. Many of these assets are tangible, such as machinery, factories, and offices; others are intangible, such as technical expertise, trademarks and patents. All of them need to be paid ...

Major Areas of finance - ANSWER-Corporate, Investments, Financial Institutions, International Finance Corporate Finance - ANSWER-broadest area, important is all types, includes making decisions regarding plant expansions to choosing what type of securities to issue when finance an expansion In...

Book value - ANSWER-amount of capital firm has received from shareholders in the past Market Value depends on... - ANSWER-future dividends shareholders expect to receive Common Stock - ANSWER-Gives the shareholder ownership of a corporation; power to elect board of directors Additional Paid...

What is Corporate Finance? - ANSWER-No matter what type of business you started, you would always HAVE to answer these 3 Important questions relating to Finance: What are the THREE BIG QUESTIONS that help define Corporate Finance? *NUMBER 1* - ANSWER-1. *WHAT* long term investments should you tak...