Chapter 1: Overview of Corporate
Finance Questions and Answers High
Grade 2023
capital budgeting - -what projects will be profitable and what won't be?
-capital structure - -how much of the firms assets will be financed with debts? and how much
will be financed by equity?
-working capital management - -how will you manage firms everyday financial activities?
-sole proprietorships - -businesses that have only one owner - pros: easy to start, no double tax ;
cons: unlimited. liability, hard to transfer interest and expand
-partnership - -a business owned by two or more people - pros: easy to start, no double tax ; cons:
liabilities can be unlimited, must dissolve if one wants to sell, hard to transfer interests
-corporations - -businesses that are owned by many investors who buy shares of stock - pros:
limited liability, easy to buy/sell ; cons: hard to start, taxed twice, agency issues
-The Agency Problem - -when the principle hires agent who has incentive to make decisions that
could be bad for the firm to maximize their own interests
-solution to The Agency Problem - -management needs to have incentive to act in accordance
with firms interests
-debt ratio - -debt / assets
-assets equation - -equity + debt
-financial statement - -set of docs/tables that report the financial status of a company (balance
sheet, income statement, cash flow statement)
-total assets - -= total liabilities + total shareholder equity & = total current assets + fixed long-
term assets
-equity multiplier - -= total assets / total equity (see how much of the assets to funded by equity)
-net working captial - -= current assets - current liabilities (degree to which the firm is capable of
meeting its short-term liabilities)
-retained earnings - -= profit / net income - dividends paid
Finance Questions and Answers High
Grade 2023
capital budgeting - -what projects will be profitable and what won't be?
-capital structure - -how much of the firms assets will be financed with debts? and how much
will be financed by equity?
-working capital management - -how will you manage firms everyday financial activities?
-sole proprietorships - -businesses that have only one owner - pros: easy to start, no double tax ;
cons: unlimited. liability, hard to transfer interest and expand
-partnership - -a business owned by two or more people - pros: easy to start, no double tax ; cons:
liabilities can be unlimited, must dissolve if one wants to sell, hard to transfer interests
-corporations - -businesses that are owned by many investors who buy shares of stock - pros:
limited liability, easy to buy/sell ; cons: hard to start, taxed twice, agency issues
-The Agency Problem - -when the principle hires agent who has incentive to make decisions that
could be bad for the firm to maximize their own interests
-solution to The Agency Problem - -management needs to have incentive to act in accordance
with firms interests
-debt ratio - -debt / assets
-assets equation - -equity + debt
-financial statement - -set of docs/tables that report the financial status of a company (balance
sheet, income statement, cash flow statement)
-total assets - -= total liabilities + total shareholder equity & = total current assets + fixed long-
term assets
-equity multiplier - -= total assets / total equity (see how much of the assets to funded by equity)
-net working captial - -= current assets - current liabilities (degree to which the firm is capable of
meeting its short-term liabilities)
-retained earnings - -= profit / net income - dividends paid
