Corporate Finance – Exam 1, University of Maryland, 2026 – Study
Material and Practice Questions
The Field of Finance - ANS✔✔ the study of how to make good decisions that involve money
Corporate Finance - ANS✔✔ the study of ways to answer these three questions
1. What long-term investments should you take on (i.e., what lines of business will you be in and
what sorts of buildings, machinery, and equipment will you need?)
2. Where will you get the long-term financing to pay for your investment? Will you bring in
other owners or will you borrow the money?
3. How will you manage your everyday financial activities, such as collecting from customers and
paying suppliers?
1. Capital budgeting - ANS✔✔ the process of planning and managing a firm's long-term
investment
◦ Evaluating the size, timing, and risk of future cash flows is the essence of capital budgeting
Capital structure - ANS✔✔ the mixture of debt and equity maintained by a firm
◦ How much should the firm borrow (i.e., what mixture of debt and equity is best)?
Forms of Business Organization - ANS✔✔ • who controls
• who owns
• owners risks
• access to capital
• tax ramifications
Sole partnership: control - ANS✔✔ owner
,Sole partnership: own - ANS✔✔ 1
Sole partnership: owners risk - ANS✔✔ unlimited
Sole partnership: access to capital - ANS✔✔ not easy
Sole partnership: tax - ANS✔✔ single
General Partnership: control - ANS✔✔ GP, needs at least 1
General Partnership: own - ANS✔✔ >2
General Partnership: owner risk - ANS✔✔ unlimited
General Partnership: access to capital - ANS✔✔ not easy
tax: single - ANS✔✔
Limited partnership: control - ANS✔✔ GPs
Limited partnership: own - ANS✔✔ NA
Limited partnership: owners risk - ANS✔✔ limited
Limited partnership: access to capital - ANS✔✔ easier
, Limited partnership: tax - ANS✔✔ double
Corporation: control - ANS✔✔ managers
Corporation: own - ANS✔✔ stockholders
Corporation: owners risk - ANS✔✔ limited
Corporation: access to capital - ANS✔✔ easier
Corporation: tax - ANS✔✔ double
Sole proprietorship - ANS✔✔ a business owned by a single individual
Disadvantages of Sole Proprietorship - ANS✔✔ ◦ Owner has unlimited liability for business
debts
◦ All business income is taxed as personal income
◦ Life of sole proprietorship is limited to owner's life span
◦ Amount of equity that can be raised is limited to the amount of the proprietor's personal
wealth
◦ Ownership may be difficult to transfer
Advantages of Sole Proprietorship - ANS✔✔ ◦ Simplest type of business to start
◦ Least regulated form of organization
◦ Owner keeps all the profits
Material and Practice Questions
The Field of Finance - ANS✔✔ the study of how to make good decisions that involve money
Corporate Finance - ANS✔✔ the study of ways to answer these three questions
1. What long-term investments should you take on (i.e., what lines of business will you be in and
what sorts of buildings, machinery, and equipment will you need?)
2. Where will you get the long-term financing to pay for your investment? Will you bring in
other owners or will you borrow the money?
3. How will you manage your everyday financial activities, such as collecting from customers and
paying suppliers?
1. Capital budgeting - ANS✔✔ the process of planning and managing a firm's long-term
investment
◦ Evaluating the size, timing, and risk of future cash flows is the essence of capital budgeting
Capital structure - ANS✔✔ the mixture of debt and equity maintained by a firm
◦ How much should the firm borrow (i.e., what mixture of debt and equity is best)?
Forms of Business Organization - ANS✔✔ • who controls
• who owns
• owners risks
• access to capital
• tax ramifications
Sole partnership: control - ANS✔✔ owner
,Sole partnership: own - ANS✔✔ 1
Sole partnership: owners risk - ANS✔✔ unlimited
Sole partnership: access to capital - ANS✔✔ not easy
Sole partnership: tax - ANS✔✔ single
General Partnership: control - ANS✔✔ GP, needs at least 1
General Partnership: own - ANS✔✔ >2
General Partnership: owner risk - ANS✔✔ unlimited
General Partnership: access to capital - ANS✔✔ not easy
tax: single - ANS✔✔
Limited partnership: control - ANS✔✔ GPs
Limited partnership: own - ANS✔✔ NA
Limited partnership: owners risk - ANS✔✔ limited
Limited partnership: access to capital - ANS✔✔ easier
, Limited partnership: tax - ANS✔✔ double
Corporation: control - ANS✔✔ managers
Corporation: own - ANS✔✔ stockholders
Corporation: owners risk - ANS✔✔ limited
Corporation: access to capital - ANS✔✔ easier
Corporation: tax - ANS✔✔ double
Sole proprietorship - ANS✔✔ a business owned by a single individual
Disadvantages of Sole Proprietorship - ANS✔✔ ◦ Owner has unlimited liability for business
debts
◦ All business income is taxed as personal income
◦ Life of sole proprietorship is limited to owner's life span
◦ Amount of equity that can be raised is limited to the amount of the proprietor's personal
wealth
◦ Ownership may be difficult to transfer
Advantages of Sole Proprietorship - ANS✔✔ ◦ Simplest type of business to start
◦ Least regulated form of organization
◦ Owner keeps all the profits
