CFIN - Corporate Finance
Scott Besley
9780357515150
7th Revised edition
50 common test questions and answers
All chapters covered
Level: ADVANCED
,Contents
Introduction to Corporate Finance...............................................................3
Financial Statements, Cash Flow, and Taxes...............................................3
Analysis of Financial Statements.................................................................4
Time Value of Money...................................................................................4
Bonds, Bond Valuation, and Interest Rates..................................................5
Risk and Return...........................................................................................5
Stock Valuation............................................................................................7
Cost of Capital.............................................................................................7
Capital Budgeting Techniques.....................................................................8
....................................................................................................................8
Cash Flow Estimation and Risk Analysis......................................................8
The Basics of Capital Structure....................................................................9
Dividend Policy..........................................................................................10
Working Capital Management...................................................................11
Financial Planning and Forecasting............................................................11
Multinational Financial Management.........................................................11
Final Conceptual Questions.......................................................................12
, Introduction to Corporate Finance
1. Question: What is the primary financial goal of a corporation, and
why does it align with shareholder wealth maximization?
Answer: The primary financial goal is to maximize shareholder
wealth, represented by the market value of the company's stock.
This aligns with shareholder wealth maximization because it reflects
the firm's ability to generate cash flows and manage risk, ensuring
efficient allocation of resources.
2. Question: Explain the difference between profit maximization and
shareholder wealth maximization.
Answer: Profit maximization focuses on short-term earnings, often
ignoring risk and timing of cash flows. Shareholder wealth
maximization considers long-term stock value, accounting for risk,
cash flow timing, and sustainability.
3. Question: How does the agency problem arise in corporate
finance?
Answer: The agency problem arises when there is a conflict of
interest between managers (agents) and shareholders (principals).
Managers may prioritize personal benefits over shareholder
interests, leading to inefficiencies.
Financial Statements, Cash Flow, and Taxes
4. Question: Why is the cash flow statement considered more
important than the income statement for corporate finance decision-
making?
Answer: The cash flow statement provides information about a
firm's liquidity and its ability to generate cash to meet obligations.
Unlike the income statement, it avoids non-cash items, such as
depreciation, offering a clearer view of financial health.
5. Question: How does depreciation affect cash flow, even though it is
a non-cash expense?
Answer: Depreciation reduces taxable income, lowering the
company's tax liability. This tax shield increases operating cash flow
by reducing cash outflows for taxes.
6. Question: What is the difference between operating cash flow
(OCF) and free cash flow (FCF)?
Answer: Operating cash flow is the cash generated from core
business operations, while free cash flow subtracts capital
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