FIN3703 ASSIGNMENT 1 STUDY GUIDE
2025/2026 VERIFIED QUESTIONS AND
CORRECT SOLUTIONS WITH RATIONALES
|| 100% GUARANTEED PASS
Topic 1: Introduction to Corporate Finance & The Financial Environment
1. Q: What is the primary goal of corporate finance?
• A: To maximize shareholder wealth.
• Rationale: This goal focuses on increasing the long-term value of the firm's stock, which
is a more comprehensive and measurable objective than simply maximizing profits, as it
accounts for risk and the timing of cash flows.
2. Q: What is an agency problem?
• A: A conflict of interest where management (agents) may act in their own best interest
rather than in the best interest of shareholders (principals).
• Rationale: This arises from the separation of ownership and control in a corporation.
Examples include management pursuing personal perks or avoiding risky but profitable
projects.
,3. Q: What is the difference between capital budgeting and capital structure?
• A: Capital budgeting is the process of planning and managing a firm's long-term
investments. Capital structure is the specific mixture of long-term debt and equity the
firm uses to finance its operations.
• Rationale: Capital budgeting answers "What assets do we buy?" while capital structure
answers "How do we pay for those assets?"
4. Q: Which financial statement shows a firm's financial position at a specific point in
time?
• A: The Balance Sheet.
• Rationale: The Balance Sheet is based on the accounting equation: Assets = Liabilities +
Shareholders' Equity, providing a snapshot of what a company owns and owes.
5. Q: What is the Sarbanes-Oxley Act (SOX) designed to do?
• A: To protect investors from corporate accounting fraud by improving the accuracy and
reliability of corporate disclosures.
• Rationale: Enacted after scandals like Enron and WorldCom, SOX established stricter
rules for financial reporting and internal controls.
Topic 2: Financial Statements, Taxes, and Cash Flow
6. Q: What is the formula for Operating Cash Flow (OCF)?
, • A: OCF = EBIT + Depreciation - Taxes.
• Rationale: This measures the cash generated from a firm's normal business operations,
adding back non-cash expenses (depreciation) and accounting for taxes paid.
7. Q: What is the difference between net income and operating cash flow?
• A: Net income is an accounting profit based on accrual accounting, while operating cash
flow is the actual cash generated from operations.
• Rationale: A firm can be profitable on paper (positive net income) but still fail due to a
lack of cash flow.
8. Q: What is the change in Net Working Capital (NWC)?
• A: Change in NWC = (Ending Current Assets - Ending Current Liabilities) - (Beginning
Current Assets - Beginning Current Liabilities).
• Rationale: An increase in NWC represents a use of cash (cash is tied up in operations),
while a decrease is a source of cash.
9. Q: What is free cash flow (FCF) to the firm?
• A: FCF = Operating Cash Flow - Capital Expenditures - Change in Net Working Capital.
• Rationale: This is the cash flow available to all investors (both debt and equity holders)
after the company has paid for all operating expenses and necessary investments in fixed
assets and working capital.
10. Q: Why is depreciation added back to net income on the statement of cash flows?
- A: Because depreciation is a non-cash expense; it reduces net income but does not involve an
2025/2026 VERIFIED QUESTIONS AND
CORRECT SOLUTIONS WITH RATIONALES
|| 100% GUARANTEED PASS
Topic 1: Introduction to Corporate Finance & The Financial Environment
1. Q: What is the primary goal of corporate finance?
• A: To maximize shareholder wealth.
• Rationale: This goal focuses on increasing the long-term value of the firm's stock, which
is a more comprehensive and measurable objective than simply maximizing profits, as it
accounts for risk and the timing of cash flows.
2. Q: What is an agency problem?
• A: A conflict of interest where management (agents) may act in their own best interest
rather than in the best interest of shareholders (principals).
• Rationale: This arises from the separation of ownership and control in a corporation.
Examples include management pursuing personal perks or avoiding risky but profitable
projects.
,3. Q: What is the difference between capital budgeting and capital structure?
• A: Capital budgeting is the process of planning and managing a firm's long-term
investments. Capital structure is the specific mixture of long-term debt and equity the
firm uses to finance its operations.
• Rationale: Capital budgeting answers "What assets do we buy?" while capital structure
answers "How do we pay for those assets?"
4. Q: Which financial statement shows a firm's financial position at a specific point in
time?
• A: The Balance Sheet.
• Rationale: The Balance Sheet is based on the accounting equation: Assets = Liabilities +
Shareholders' Equity, providing a snapshot of what a company owns and owes.
5. Q: What is the Sarbanes-Oxley Act (SOX) designed to do?
• A: To protect investors from corporate accounting fraud by improving the accuracy and
reliability of corporate disclosures.
• Rationale: Enacted after scandals like Enron and WorldCom, SOX established stricter
rules for financial reporting and internal controls.
Topic 2: Financial Statements, Taxes, and Cash Flow
6. Q: What is the formula for Operating Cash Flow (OCF)?
, • A: OCF = EBIT + Depreciation - Taxes.
• Rationale: This measures the cash generated from a firm's normal business operations,
adding back non-cash expenses (depreciation) and accounting for taxes paid.
7. Q: What is the difference between net income and operating cash flow?
• A: Net income is an accounting profit based on accrual accounting, while operating cash
flow is the actual cash generated from operations.
• Rationale: A firm can be profitable on paper (positive net income) but still fail due to a
lack of cash flow.
8. Q: What is the change in Net Working Capital (NWC)?
• A: Change in NWC = (Ending Current Assets - Ending Current Liabilities) - (Beginning
Current Assets - Beginning Current Liabilities).
• Rationale: An increase in NWC represents a use of cash (cash is tied up in operations),
while a decrease is a source of cash.
9. Q: What is free cash flow (FCF) to the firm?
• A: FCF = Operating Cash Flow - Capital Expenditures - Change in Net Working Capital.
• Rationale: This is the cash flow available to all investors (both debt and equity holders)
after the company has paid for all operating expenses and necessary investments in fixed
assets and working capital.
10. Q: Why is depreciation added back to net income on the statement of cash flows?
- A: Because depreciation is a non-cash expense; it reduces net income but does not involve an
