FUNDAMENTALS OF CORPORATE FINANCE
11TH CANADIAN EDITION EXAM QUESTIONS
AND SOLUTIONS GRADED A+
◉ Capital Budgeting.
Answer: The process of planning and managing a firm's long-term
investments.
In capital budgeting, the financial manager tries to identify
investment opportunities that are worth more to the firm than they
cost to acquire. Loosely speaking, this means that the value of the
cash flow generated by an asset exceeds the cost of that asset.
◉ Capital Structure.
Answer: The mixture of debt and equity maintained by a firm.
A firm's capital structure (or financial structure) is the specific
mixture of long-term debt and equity the firm uses to finance its
operations.
The financial manager has two concerns in this area. First, how
much should the firm borrow? That is, what mixture of debt and
equity is best? The mixture chosen will affect both the risk and the
,value of the firm. Second, what are the least expensive sources of
funds for the firm?
◉ Working Capital.
Answer: A firm's short-term assets and liabilities.
The term working capital refers to a firm's short-term assets, such as
inventory, and its short-term liabilities, such as money owed to
suppliers. Managing the firm's working capital is a day-to-day
activity that ensures that the firm has sufficient resources to
continue its operations and avoid costly interruptions. This involves
a number of activities related to the firm's receipt and disbursement
of cash.
Some questions about working capital that must be answered are
the following: (1) How much cash and inventory should we keep on
hand? (2) Should we sell on credit? If so, what terms will we offer,
and to whom will we extend them? (3) How will we obtain any
needed short-term financing? Will we purchase on credit, or will we
borrow in the short term and pay cash? If we borrow in the short
term, how and where should we do it? These are just a small sample
of the issues that arise in managing a firm's working capital.
◉ Why is the corporate form superior when it comes to raising
cash?.
, Answer: The relative ease of transferring ownership, the limited
liability for business debts, and the unlimited life of the business are
why the corporate form is superior for raising cash.
If a corporation needs new equity, for example, it can sell new shares
of stock and attract new investors. Apple is an example. The
company was a pioneer in the personal computer business. As
demand for its products exploded, it had to convert to the corporate
form of organization to raise the capital needed to fund growth and
new product development. The number of owners can be huge;
larger corporations have many thousands or even millions of
stockholders. For example, in 2020, General Electric Company
(better known as GE) had about 440,000 stockholders and about 8.7
billion shares outstanding. In such cases, ownership can change
continuously without affecting the continuity of the business
◉ What is the difference between a general and a limited
partnership?.
Answer: In a general partnership, all the partners share in gains or
losses, and all have unlimited liability for all partnership debts, not
just some particular share. The way partnership gains (and losses)
are divided is described in the partnership agreement.
In a limited partnership, one or more general partners will run the
business and have unlimited liability, but there will be one or more
limited partners who will not actively participate in the business. A
11TH CANADIAN EDITION EXAM QUESTIONS
AND SOLUTIONS GRADED A+
◉ Capital Budgeting.
Answer: The process of planning and managing a firm's long-term
investments.
In capital budgeting, the financial manager tries to identify
investment opportunities that are worth more to the firm than they
cost to acquire. Loosely speaking, this means that the value of the
cash flow generated by an asset exceeds the cost of that asset.
◉ Capital Structure.
Answer: The mixture of debt and equity maintained by a firm.
A firm's capital structure (or financial structure) is the specific
mixture of long-term debt and equity the firm uses to finance its
operations.
The financial manager has two concerns in this area. First, how
much should the firm borrow? That is, what mixture of debt and
equity is best? The mixture chosen will affect both the risk and the
,value of the firm. Second, what are the least expensive sources of
funds for the firm?
◉ Working Capital.
Answer: A firm's short-term assets and liabilities.
The term working capital refers to a firm's short-term assets, such as
inventory, and its short-term liabilities, such as money owed to
suppliers. Managing the firm's working capital is a day-to-day
activity that ensures that the firm has sufficient resources to
continue its operations and avoid costly interruptions. This involves
a number of activities related to the firm's receipt and disbursement
of cash.
Some questions about working capital that must be answered are
the following: (1) How much cash and inventory should we keep on
hand? (2) Should we sell on credit? If so, what terms will we offer,
and to whom will we extend them? (3) How will we obtain any
needed short-term financing? Will we purchase on credit, or will we
borrow in the short term and pay cash? If we borrow in the short
term, how and where should we do it? These are just a small sample
of the issues that arise in managing a firm's working capital.
◉ Why is the corporate form superior when it comes to raising
cash?.
, Answer: The relative ease of transferring ownership, the limited
liability for business debts, and the unlimited life of the business are
why the corporate form is superior for raising cash.
If a corporation needs new equity, for example, it can sell new shares
of stock and attract new investors. Apple is an example. The
company was a pioneer in the personal computer business. As
demand for its products exploded, it had to convert to the corporate
form of organization to raise the capital needed to fund growth and
new product development. The number of owners can be huge;
larger corporations have many thousands or even millions of
stockholders. For example, in 2020, General Electric Company
(better known as GE) had about 440,000 stockholders and about 8.7
billion shares outstanding. In such cases, ownership can change
continuously without affecting the continuity of the business
◉ What is the difference between a general and a limited
partnership?.
Answer: In a general partnership, all the partners share in gains or
losses, and all have unlimited liability for all partnership debts, not
just some particular share. The way partnership gains (and losses)
are divided is described in the partnership agreement.
In a limited partnership, one or more general partners will run the
business and have unlimited liability, but there will be one or more
limited partners who will not actively participate in the business. A
