CORPORATE FINANCE CHAPTER 1 QUESTIONS
& ANSWERS UPDATED 2024 - 25
what is corporate finance ANS -1) what long term investments should the firm take on?
investment decision i.e. merge, takeover
(capital budgeting decision)
2) where will we get the long term financing to pay for the investment?
financing decision
(capital structure decision: mixture of debt + equity)
3) how will we manage the everyday financial activities of the firm?
(working capital management decision: manage current assets + current liabilities i.e. inventory
management, sell on credits (accounts receivable), buy on credits (how to pay suppliers))
Financial Managers ANS -Chief Financial Officer (CFO): the top financial manager in the firm
Treasurer: oversees cash management, credit management, capital expenditures, and financial planning
Controller: oversees taxes, cost accounting, financial accounting, and data processing
Capital Budgeting ANS -what long term investments or projects should the business take on?
Capital Structure ANS --how should we pay for our assets?
-should we use debt or equity?
Working Capital Management ANS -How do we manage the day-to-day activities of the firm: short term
assets and short term liabilities?
Sole Proprietorship ANS -single owner
, ADVANTAGES:
-easiest to start
-least regulated
-single owner keeps all profit
-taxed once as personal income
DISADVANTAGES:
-limited to life of owner
-equity capital limited to owners personal wealth
-unlimited liability
-difficult to sell ownership interest
Partnership ANS -general: have unlimited liability on the firms debt
limited: have limited liability on the firms debt
-neither are taxed separately from the owners
ADVANTAGES:
-2+ owners
-more capital available
-relatively easy to start
-income taxed once as personal income
DISADVANTAGES:
-liability (general v limited)
-partnership dissolves when one partner (general partner) dies or wishes to sell
-difficult to transfer ownership
& ANSWERS UPDATED 2024 - 25
what is corporate finance ANS -1) what long term investments should the firm take on?
investment decision i.e. merge, takeover
(capital budgeting decision)
2) where will we get the long term financing to pay for the investment?
financing decision
(capital structure decision: mixture of debt + equity)
3) how will we manage the everyday financial activities of the firm?
(working capital management decision: manage current assets + current liabilities i.e. inventory
management, sell on credits (accounts receivable), buy on credits (how to pay suppliers))
Financial Managers ANS -Chief Financial Officer (CFO): the top financial manager in the firm
Treasurer: oversees cash management, credit management, capital expenditures, and financial planning
Controller: oversees taxes, cost accounting, financial accounting, and data processing
Capital Budgeting ANS -what long term investments or projects should the business take on?
Capital Structure ANS --how should we pay for our assets?
-should we use debt or equity?
Working Capital Management ANS -How do we manage the day-to-day activities of the firm: short term
assets and short term liabilities?
Sole Proprietorship ANS -single owner
, ADVANTAGES:
-easiest to start
-least regulated
-single owner keeps all profit
-taxed once as personal income
DISADVANTAGES:
-limited to life of owner
-equity capital limited to owners personal wealth
-unlimited liability
-difficult to sell ownership interest
Partnership ANS -general: have unlimited liability on the firms debt
limited: have limited liability on the firms debt
-neither are taxed separately from the owners
ADVANTAGES:
-2+ owners
-more capital available
-relatively easy to start
-income taxed once as personal income
DISADVANTAGES:
-liability (general v limited)
-partnership dissolves when one partner (general partner) dies or wishes to sell
-difficult to transfer ownership
