Fundamentals of Corporate Finance Key Revision Questions and CORRECT Answers

capex decisions - capital expenditure decision:decisions to invest in tangible/intangible assets capex - Capital Expenditure-land,property, equip, long term real assets free cash flow - Cash available once the firm has covered it's capital expenditures financing decisions - concerned with the ways in which firms obtain and manage long term financing to acquire and support their productive assets(finance or pay for assets) -the form and amount of financing a firm's investment, how to get $ in the door, should I issue debt or isssue equity? real assets - Assets used to produce goods and services, not financial asset - future benefit economic resource future economic value will produce profit/value in the future financial asset - financial claims to income generated by real assets -bonds corporation - A business owned by stockholders who share in its profits but are not personally responsible for its debts -organized as a seperate legal identity owned by stockholders "a nexus of contracts" A distinct legal entity, owned by shareholders Organized under 'articles of incorporation' Limited liability - shareholders not personally responsible for debts of corporation May be 'private' or 'public' (latter has shares issued and trading on exchanges) May be 'closely held,' or widely dispersed shareholders Shareholders elect a board of directors, who appoint and monitor managers "Separation of ownership and control" - shareholders defer to board, managers Managers may quit, or be replaced, and corporation continues Downside? "Agency costs" Berle and Means, The Modern Corporation and Private Property Two other downsides Expensive legal/compliance machinery "Double taxation" - corporate income taxed, and so are dividends and capital gains for shareholders llimited liability - the owners of a corp are not personally liable for obligations of the corp- but can still be sued for personal decisions cfo - chief financial officer-leader, the most important leads financial decisions and execution oversees offices of treasurer, controller Oversees whole financial staff Close contact with CEO, other senior execs Key external voice for corporation treasurer - responsible for financing, cash management, and relationshp with banks and other instit. internal/external manage. controller - internal statements- responsible for budgeting, taxes, and accounting oppurtunity cost of capital - minimum acceptable rate of return on capital investment- the rate of return that investions could earn in finance. markets, look at proj. of similar risk, return agency problems - managers are agents for shareholders, but the managers may act in their own interest stakeholder - anyone with a financial interest in the firm financial market - market where securities are issued and traded primary market - market for the sale of new securities by corporations, A financial market in which new issues of a security are sold to initial buyers. secondary market - market in which previously issued securities are traded amond investors, Exchanges and over-the-counter markets where securities are bought and sold after original issuance. Proceeds of secondary market sales go to the selling investors, not to the companies that originally issued the securities.