FINANCIAL MANAGEMENT: CORE CONCEPTS
COMPREHENSIVE SOLVED QUESTIONS AND
COMPLETE ANSWERS
◉ Which business form has LIMITED liability?
Answer: Corporation — owners (shareholders) can only lose their
investment, not personal assets.
◉ Which business form faces DOUBLE TAXATION?
Answer: Corporation — profits taxed at corporate level, then
dividends taxed again at personal level.
◉ What is the Equity Multiplier formula?
Answer: Equity Multiplier = Total Assets / Total Equity. Measures
financial leverage — how much assets are financed by equity.
◉ What is the formula for the Balance Sheet equation?
Answer: Assets = Liabilities + Stockholders' Equity. This must
ALWAYS balance.
◉ What is Book Value vs. Market Value?
, Answer: Book Value = accounting value (historical cost minus
depreciation). Market Value = what the market is willing to pay
today. Finance uses MARKET values for decisions.
◉ What is EBIT?
Answer: Earnings Before Interest and Taxes. EBIT = Revenue − COGS
− Operating Expenses − Depreciation. It represents operating profit
before financing costs and taxes.
◉ What is the Marginal Tax Rate?
Answer: The tax rate on the NEXT dollar earned. Always use this for
financial decisions (not the average tax rate).
◉ What is the formula for Operating Cash Flow (OCF)?
Answer: OCF = EBIT + Depreciation − Taxes. Depreciation is added
back because it is non-cash — no cash actually left the firm.
◉ What is the formula for Net Capital Spending (NCS)?
Answer: NCS = Ending Net Fixed Assets − Beginning Net Fixed
Assets + Depreciation. Measures net cash spent on long-term assets.
◉ What is the formula for Change in Net Working Capital (ΔNWC)?
Answer: ΔNWC = Ending NWC − Beginning NWC, where NWC =
Current Assets − Current Liabilities.
COMPREHENSIVE SOLVED QUESTIONS AND
COMPLETE ANSWERS
◉ Which business form has LIMITED liability?
Answer: Corporation — owners (shareholders) can only lose their
investment, not personal assets.
◉ Which business form faces DOUBLE TAXATION?
Answer: Corporation — profits taxed at corporate level, then
dividends taxed again at personal level.
◉ What is the Equity Multiplier formula?
Answer: Equity Multiplier = Total Assets / Total Equity. Measures
financial leverage — how much assets are financed by equity.
◉ What is the formula for the Balance Sheet equation?
Answer: Assets = Liabilities + Stockholders' Equity. This must
ALWAYS balance.
◉ What is Book Value vs. Market Value?
, Answer: Book Value = accounting value (historical cost minus
depreciation). Market Value = what the market is willing to pay
today. Finance uses MARKET values for decisions.
◉ What is EBIT?
Answer: Earnings Before Interest and Taxes. EBIT = Revenue − COGS
− Operating Expenses − Depreciation. It represents operating profit
before financing costs and taxes.
◉ What is the Marginal Tax Rate?
Answer: The tax rate on the NEXT dollar earned. Always use this for
financial decisions (not the average tax rate).
◉ What is the formula for Operating Cash Flow (OCF)?
Answer: OCF = EBIT + Depreciation − Taxes. Depreciation is added
back because it is non-cash — no cash actually left the firm.
◉ What is the formula for Net Capital Spending (NCS)?
Answer: NCS = Ending Net Fixed Assets − Beginning Net Fixed
Assets + Depreciation. Measures net cash spent on long-term assets.
◉ What is the formula for Change in Net Working Capital (ΔNWC)?
Answer: ΔNWC = Ending NWC − Beginning NWC, where NWC =
Current Assets − Current Liabilities.
