APPLIED CORPORATE FINANCE EXAM 1
QUESTIONS AND ANSWERS 2024 - 2025
project valuation ANS -firms acquire productive capacity by assembling necessary assets
enterprise valuation ANS -acquisitions of entire businesses- acquiring the productive assets of an
existing firm
objective of firms ANS -to create wealth by initiating and managing investments that generate future
cash flows that are worth more than the amount invested
management's goal ANS -to avoid decision errors based on flawed or incomplete analysis
What amount of large investment projects fail to achieve their hoped-for results? ANS -over half
Potential causes of large investment projects failing to achieve their hoped-for results ANS --Managers
"go with their gut"
-Investments in risky projects
-Uncertain future events
-Incomplete information
-we want to cut down on managers going with their gut and incomplete information
5 Important Issues to think About When Making a Major Investment ANS -1. Does the "story" make
sense?
2. What are the risks involved in undertaking the investment?
3. How can the investment be financed?
4. How does the investment affect near-term earnings?
5. Does the investment have inherent flexibilities?
,What must the "story" consider? ANS -competitive and comparative advantages, synergies
Three Phase Investment Evaluation Process ANS -Phase I: Investment (Idea) Origination and Analysis
Phase II: Managerial Review and Recommendation
Phase III: Managerial Decision and Approval
Steps of Phase I: Investment (Idea) Origination and Analysis ANS -1. Conduct a strategic assessment
2. Estimate the investment's value ("crunch the numbers")
3. Prepare an investment evaluation report and recommendation report
how to conduct a strategic assessment ANS -come up value proposition, soundness of strategy, usually
done by internal business development group
-the 5 questions
how to estimate the investment's value ("crunch the numbers") ANS -Valuation using DCF, multiples,
but also including synergies, real options, ability to manage or hedge risk
Steps of Phase II: Managerial Review and Recommendation ANS -4. Evaluate the investment's strategic
assumptions
5. Review and evaluate the methods and assumptions used to estimate the investment's NPV
6. Adjust for inherent estimation errors induced by bias, and formulate a recommendation regarding the
proposed investment
Who evaluate's an investment's strategic assumptions? ANS -performed often by investment review
committee, allows bigger-picture concerns to enter (other projects being considered with interfering
goals and resources? Financing concerns?)
Steps of Phase III: Managerial Decision and Approval ANS -7. Make a decision
8. Seek final managerial and possibly board approval
Difficulties with Investment Evaluation Process ANS --Very costly and time-consuming
, -Subject to biased estimates of project value such as conflicts of interest and incentive problems
-Affected by problems arising out of differences in the information available to project champions and
the internal review or control group (the strategic planning committee)
What does valuation require? ANS -A forecast of the investment's free cash flow and an estimate of the
appropriate risk-adjusted discount rate
Difference between valuation for a project and a business ANS -Firms typically have a history of past
performance that is recorded in their financial statements, whereas proposed projects do not
The accrual-based income statement is constructed using what two fundamental principles? ANS -the
revenue recognition principle, to determine which revenues to include in the statement, and the
matching principle, to determine what expenses to include.
Revenue Recognition Principle ANS -revenue is recognized in the period in which products (goods or
services), merchandise, or other assets are exchanged for cash or claims on cash
Matching Principle ANS -The expenses reported in the firm's income statement are those that were
incurred in the process of generating the reported revenues. -expenses are matched to reported
revenues.
The income statement is prepared using the principles of _______, as opposed to cash accounting,
which means that the entries in the income statement do not necessarily correspond to transfers of
cash during the period for which the statement was prepared ANS -accrual
Why doesn't reported net income have to equal cash flow? ANS -there is no requirement that cash
ever change hands during the period
operating income ANS -the income generated by the firm's core business operations
non-operating income ANS -income generated by investments the firm has made in assets that are
unrelated to the firm's primary business
QUESTIONS AND ANSWERS 2024 - 2025
project valuation ANS -firms acquire productive capacity by assembling necessary assets
enterprise valuation ANS -acquisitions of entire businesses- acquiring the productive assets of an
existing firm
objective of firms ANS -to create wealth by initiating and managing investments that generate future
cash flows that are worth more than the amount invested
management's goal ANS -to avoid decision errors based on flawed or incomplete analysis
What amount of large investment projects fail to achieve their hoped-for results? ANS -over half
Potential causes of large investment projects failing to achieve their hoped-for results ANS --Managers
"go with their gut"
-Investments in risky projects
-Uncertain future events
-Incomplete information
-we want to cut down on managers going with their gut and incomplete information
5 Important Issues to think About When Making a Major Investment ANS -1. Does the "story" make
sense?
2. What are the risks involved in undertaking the investment?
3. How can the investment be financed?
4. How does the investment affect near-term earnings?
5. Does the investment have inherent flexibilities?
,What must the "story" consider? ANS -competitive and comparative advantages, synergies
Three Phase Investment Evaluation Process ANS -Phase I: Investment (Idea) Origination and Analysis
Phase II: Managerial Review and Recommendation
Phase III: Managerial Decision and Approval
Steps of Phase I: Investment (Idea) Origination and Analysis ANS -1. Conduct a strategic assessment
2. Estimate the investment's value ("crunch the numbers")
3. Prepare an investment evaluation report and recommendation report
how to conduct a strategic assessment ANS -come up value proposition, soundness of strategy, usually
done by internal business development group
-the 5 questions
how to estimate the investment's value ("crunch the numbers") ANS -Valuation using DCF, multiples,
but also including synergies, real options, ability to manage or hedge risk
Steps of Phase II: Managerial Review and Recommendation ANS -4. Evaluate the investment's strategic
assumptions
5. Review and evaluate the methods and assumptions used to estimate the investment's NPV
6. Adjust for inherent estimation errors induced by bias, and formulate a recommendation regarding the
proposed investment
Who evaluate's an investment's strategic assumptions? ANS -performed often by investment review
committee, allows bigger-picture concerns to enter (other projects being considered with interfering
goals and resources? Financing concerns?)
Steps of Phase III: Managerial Decision and Approval ANS -7. Make a decision
8. Seek final managerial and possibly board approval
Difficulties with Investment Evaluation Process ANS --Very costly and time-consuming
, -Subject to biased estimates of project value such as conflicts of interest and incentive problems
-Affected by problems arising out of differences in the information available to project champions and
the internal review or control group (the strategic planning committee)
What does valuation require? ANS -A forecast of the investment's free cash flow and an estimate of the
appropriate risk-adjusted discount rate
Difference between valuation for a project and a business ANS -Firms typically have a history of past
performance that is recorded in their financial statements, whereas proposed projects do not
The accrual-based income statement is constructed using what two fundamental principles? ANS -the
revenue recognition principle, to determine which revenues to include in the statement, and the
matching principle, to determine what expenses to include.
Revenue Recognition Principle ANS -revenue is recognized in the period in which products (goods or
services), merchandise, or other assets are exchanged for cash or claims on cash
Matching Principle ANS -The expenses reported in the firm's income statement are those that were
incurred in the process of generating the reported revenues. -expenses are matched to reported
revenues.
The income statement is prepared using the principles of _______, as opposed to cash accounting,
which means that the entries in the income statement do not necessarily correspond to transfers of
cash during the period for which the statement was prepared ANS -accrual
Why doesn't reported net income have to equal cash flow? ANS -there is no requirement that cash
ever change hands during the period
operating income ANS -the income generated by the firm's core business operations
non-operating income ANS -income generated by investments the firm has made in assets that are
unrelated to the firm's primary business
