Fundamentals of Corporate Finance Exam Practice
Questions & Answers Best Rated A+
Definition of Corporate Finance - Answer the study of the relationship between business decisions and
the value of the stock in the business
Capital Budgeting - Answer the process of planning and managing a firm's long-term investments
Capital Structure (or Financial Structure) - Answer the mixture of long-term debt and equity maintained
by a firm to finance its operations
Working Capital - Answer a firm's short-term assets (ie cash, inventory) and liabilities (ie accounts
payable to suppliers)
What is the capital budgeting decision? - Answer the acquisition of long-term investments. the value of
the cash flow generated by an asset exceeds the cost of that asset.
Sole Proprietorship - Answer business owned by a single individual.
PROs: easy and inexpensive to form, individual retains all profits
CONs: individual has unlimited liability to debt, the organization is limited to the life of the owner,
capital is often limited to owner's personal wealth
Partnership (2 types) - Answer business formed by 2 or more individuals or entities.
general: partners receive equal profits and liability
limited: one or more of the partners will be subject to liability, others will be limited but not actively
involved in management. division of profits is relative.
Corporation - Answer business created as a distinct legal entity composed of one or more individuals or
entities; a legal "person" separate and distinct from its owners; complicated to form, subject to taxes
LLC - Answer hybrid of partnership and corporation. operates and taxed like a partnership but retains
limited liability for owners, IRS may double tax if too 'corporation-like'
Questions & Answers Best Rated A+
Definition of Corporate Finance - Answer the study of the relationship between business decisions and
the value of the stock in the business
Capital Budgeting - Answer the process of planning and managing a firm's long-term investments
Capital Structure (or Financial Structure) - Answer the mixture of long-term debt and equity maintained
by a firm to finance its operations
Working Capital - Answer a firm's short-term assets (ie cash, inventory) and liabilities (ie accounts
payable to suppliers)
What is the capital budgeting decision? - Answer the acquisition of long-term investments. the value of
the cash flow generated by an asset exceeds the cost of that asset.
Sole Proprietorship - Answer business owned by a single individual.
PROs: easy and inexpensive to form, individual retains all profits
CONs: individual has unlimited liability to debt, the organization is limited to the life of the owner,
capital is often limited to owner's personal wealth
Partnership (2 types) - Answer business formed by 2 or more individuals or entities.
general: partners receive equal profits and liability
limited: one or more of the partners will be subject to liability, others will be limited but not actively
involved in management. division of profits is relative.
Corporation - Answer business created as a distinct legal entity composed of one or more individuals or
entities; a legal "person" separate and distinct from its owners; complicated to form, subject to taxes
LLC - Answer hybrid of partnership and corporation. operates and taxed like a partnership but retains
limited liability for owners, IRS may double tax if too 'corporation-like'
