FUNDAMENTALS OF CORPORATE FINANCE 13TH EDITION -
CHAPTER 1+2 QUESTIONS AND ACTUAL ANSWERS 2024 - 2025
Finance: The Five Main Areas ANS -1. Corporate finance
2. Investments
3. Financial institutions
4. International finance
5. Fintech
Capital Budgeting ANS -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 ANS -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 ANS -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? ANS -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? ANS -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 limited
partner's liability for business debts is limited to the amount that partner contributes to the partnership.
Sole Proprietorship ANS -A business owned by one person. This is the simplest type of business to start
and is the least regulated form of organization.
Depending on where you live, you might be able to start a proprietorship by doing little more than
getting a business license and opening your doors. For this reason, there are more proprietorships than
any other type of business, and many businesses that later become large corporations start out as small
proprietorships.
What are the advantages / disadvantages of a Sole Proprietorship? ANS -Advantages:
CHAPTER 1+2 QUESTIONS AND ACTUAL ANSWERS 2024 - 2025
Finance: The Five Main Areas ANS -1. Corporate finance
2. Investments
3. Financial institutions
4. International finance
5. Fintech
Capital Budgeting ANS -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 ANS -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 ANS -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? ANS -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? ANS -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 limited
partner's liability for business debts is limited to the amount that partner contributes to the partnership.
Sole Proprietorship ANS -A business owned by one person. This is the simplest type of business to start
and is the least regulated form of organization.
Depending on where you live, you might be able to start a proprietorship by doing little more than
getting a business license and opening your doors. For this reason, there are more proprietorships than
any other type of business, and many businesses that later become large corporations start out as small
proprietorships.
What are the advantages / disadvantages of a Sole Proprietorship? ANS -Advantages:
