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Test Bank for Fundamentals of Corporate Finance 6th edition by Jonathan Berk
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Test Bank for Fundamentals of Corporate Finance 6th edition by Jonathan Berk
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Test Bank for Fundamentals ofCorporate Finance 6th edition by
Jonathan Berk
Definition of Corporate Finance - ANSthe study of the relationship between business decisions
and the value of the stock in the business
Capital Budgeting - ANSthe process of planning and managing a firm's long-term investments
Capital Structure (or Financial Structure) - ANSthe mixture of long-term debt and equity
maintained by a firm to finance its operations
Working Capital - ANSa firm's short-term assets (ie cash, inventory) and liabilities (ie accounts
payable to suppliers)
What is the capital budgeting decision? - ANSthe acquisition of long-term investments. the value
of the cash flow generated by an asset exceeds the cost of that asset.
Sole Proprietorship - ANSbusiness 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) - ANSbusiness 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 - ANSbusiness 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 - ANShybrid 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? -
ANSease of transferring ownership, limited liability to debt, unlimited life of the business
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