Corporate Finance Summary Exam Questions with Correct Answers

1.1 How do you understand the following statement: "Corporate Finance is focused". - ANSWER-Goals of the Corporation: Shareholders desired wealth maximization. 1.2 Who are the principal financial managers in a corporation? Write down their main responsibilities. - ANSWER-Chief Financial Officer (CFO): Supervises all financial functions and sets overall financial strategy. Treasurer: Responsible for financing, cash management, and relationships with banks and other financial institutions Controller: Responsible for preparation of financial statements, accounting, and taxes 1.3 Explain the differences between investment and financing decisions. Provide examples. - ANSWER-Investment Decision (Capital Budgeting Decision): Decision to invest in tangible or intangible assets. ex. (Intel decides to spend $7 billion to develop a new microprocessor; Royal Dutch Shell constructs a pipeline to bring natural gas onshore from a production platform in Australia; Avon spends €200 million to launch a new range of cosmetics in European markets.) KEY: spending Financing Decision: Decision on the sources and amounts of financing. ex. (BMW borrows 350 million euros (€350million) from Deutsche Bank) KEY: buying 1.4 Explain briefly the difference between real and financial assets. Provide examples. - ANSWER-Real Assets: *Assets used to produce goods and services *Tangible (plant, office buildings, machinery, vehicles) and intangible (patents, brand names) Financial Assets: *Financial claims to the income generated by the firm's real assets (bank loan, share of stock) *Securities: purchased and traded by investors in public markets Companies usually buy real assets. These include both tangible assets such as executive airplanes and intangible assets such as brand names. To pay for these assets, they sell financial assets such as bonds. The decision about which assets to buy is usually termed the capital budgeting or investment decision. The decision about how to raise the money is usually termed the financing decision.