Chapter 1 Introduction to Corporate Finance Exam Questions and Answers

The Four Basic Areas of Finance are: - ANSWER-1. Corporate Finance 2. Investments 3. Financial Markets and Institutions 4. International Finance What is the focus of corporate finance (3 basic issues)? - ANSWER-1. What long-term investments should a firm take on? 2. Where will you get the long-term financing to pay for your investment? 3. How will you manage your everyday financial activities such as collecting from customers and paying suppliers? Capital Budgeting - ANSWER-The process of planning and managing a firm's long-term investments Capital Structure - ANSWER-The mixture of debt and equity maintained by a firm Working Capital Management - ANSWER-The process of managing a firms short-term assets and liabilities Sole Proprietorship - ANSWER-business owned by a single individual Advantages of Sole Proprietorship - ANSWER-1.Easily Established 2.Minimal Organizational Costs 3.Keep all Generated Profits Disadvantages of Sole Proprietorship - ANSWER-1.Unlimited Liability 2.Losses absorbed by owner 3.Limited Capital 4.Limited Life Partnership - ANSWER-An association of two or more individuals 2 Types of Partnership - ANSWER-1. General 2. Limited General Partnership - ANSWER-each partner is fully responsible for liabilities Limited Partnership - ANSWER-- one or more partners have limited liability - limited partners do not participate in the management - limited partners are merely investors one general partner must exist