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CORPORATE FINANCE EXAM (UMD) SOLVED #14.
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CORPORATE FINANCE EXAM (UMD) SOLVED #14Corporate Finance - correct answer the branch of finance that focus on three main
questions (Capital Budgeting, Capital Structure, Working Capital Management)
Capital Budgeting - correct answer the process of planning and managing a firm's long-
term investments (oil rigs)
Capital Structure - correct answer the mixture of debt and equity maintained by a firm
Working capital management - correct answer managing a firm's short-term assets and
liabilities
Sole Proprietorship - correct answer a business owned and run by one person (pro:
easy to set up, owner gets all the profit Cons: owner has unlimited liability, all income
taxed as personal income.)
Unlimited Liability - correct answer The owner is personally and fully responsible for all
losses and debts of the business (can take your house)
Partnership - correct answer a business formed by two or more individuals or entities
(pro: partners get to split profits among themselves cons: gps still have unlimited
liability, lps have no managerial authority, income taxed at personal rates, difficult to
transfer ownership)
Corporation - correct answer a business that is legally defined, artificial being which is
separate and distinct from its owners (has many of the same rights that individuals do
cons: costly to set up, double taxation of profits, agency conflicts)
Stock - correct answer a share of ownership in a corporation
Limited Liability - correct answer a person's financial liability is limited to a fixed sum,
most commonly the value of a person's investment in a company or partnership
Agency Conflict - correct answer the possibility of conflict of interest between the
stockholders and management of a firm
What is the goal of a firm's management? - correct answer the firm's management is to
maximize the market value of the firm's existing stock
Market Cap - correct answer The market value of equity (Price Per Share x Number of
shares outstanding)
Sarbanes-Oxley Act 2002 (SOX) - correct answer enacted by congress to reduce
accounting fraud and financial maleficence. (Firms go public overseas or go private
because of this)
, Principal - correct answer is the individual who gives authority to the agent to represent
his or her interests
Agent - correct answer a person who acts or does business for another
Principal-agent problem - correct answer principals want agents to give their maximum
effort
Agents want to receive the maximum award possible for the least amount of work
Corporate Governance - correct answer the system of rules, practices, and processes
by which a company is directed and controlled
Mechanisms employed to resolve principal-agent problem - correct answer 1. Ex-ante
contracting
2. Monitoring (boards of directors, institutional shareholders)
3. Aligning incentives (managerial compensation as stock options)
How does a firm make money - correct answer value of the firm is generated form the
cash flows its assets produce
Balance Sheet - correct answer a "snapshot" of the firm's assets and liabilities at a
given point in time
Liquidity - correct answer the ease of conversion of an asset to cash without significant
loss of value
Balance Sheet Identity - correct answer Assets = Liabilities + Stockholders' Equity
Net Working Capital (NWC) - correct answer is the difference between current assets
and current liabilities (NWC = Current Assets - Current Liabilities)
Liquid firms are less likely to experience - correct answer financial distress (however,
liquid assets typically earn very low returns)
Book Value - correct answer the original cost of the item minus any depreciation,
amortization, or impairment costs
Market Value - correct answer is the price at which assets, liabilities, or equity can
actually be bought or sold
Income Statement - correct answer financial statement summarizing a firm's
performance over a period of time
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