CORPORATE FINANCE - MODULE 1 QUESTIONS
AND ANSWERS 2024 – 2025 UPDATED.
1.1,Which,is,Capital,Structure,vs.,Capital,Budgeting?
A-smart,financing,decisions
"proportions,of,the,firm's,financing,from,current,and,long-term,debt,and,equity."
B-value-creating,projects.
"Process,of,making,and,managing,expenditure,on,long-lived,assets.",,,ANS,-Capital,Structure:,A
Capital,Budgeting:,B
1.1,What,is,Net,Working,Capital?,,,ANS,-Current,assets,minus,current,liabilities.
1.1,What,is,the,role,of,the,Controller,vs.,Treasurer?
A-manages,the,cash,flows,,managing,capital,expenditure,decisions,,and,making,financial,plans.
B-Accounting,,which,includes,taxes,,cost,and,financial,accounting,,and,information,systems.,,,ANS,-
Treasurer:,A
Controller:,B
1.2,State,the,following,about,sole,proprietorship,,partnership,,LLC,,and,corporation:
-How,many,people?
-Limited,or,unlimited,liability?
-Corporate,tax?
-Life,of,entity,limited?
-Transferability,easy,or,difficult?
,-Taxed,double?,,,ANS,-3,forms,of,business,organization
----Sole,proprietorship
-one,person
-unlimited,liability
-simple
-life,limited,to,life,of,proprietor
-no,corporate,tax.,Taxes,are,all,personal,taxes,of,owner.
-----Partnership
-unlimited,liability
-more,than,one,person.
-partnership,agreement.
-transferability,(liquidity,of,partner's,investment),is,difficult
-
general,partnership,means,all,partners,share,some,fraction,of,work,and,cash,and,to,share,profits,and,loss
es.
-Limited,partnership,limits,liabilities,of,some,partners,to,be,the,amount,of,cash,they've,contributed.,-
Usually,don't,participate,in,managing,the,business.
no,corporate,tax.,
-Taxes,are,individual.
----Corporation
-limited,liability
-individual,shares,of,ownership
-separated,ownership,of,organization,from,management
-
Corps,are,basically,individuals.,They,can,buy,and,sell,,sue,and,be,sued,,enter,into,contracts.,But,they,live,f
orever.,For,jurisdictional,purposes,,the,corporation,is,a,citizen,of,its,state,of,incorporation.
-Because,a,corporation,is,thought,of,as,a,person,it,pays,tax,(corporate,tax).
-Corporate,earnings,are,taxed,double,(earnings,by,company,and,dividends,by,shareholders).
-Each,share,gets,1,vote.
Shareholders,elect,a,board,of,directors,,who,in,turn,select,top,management.
,1.4,What,is,the,goal,of,financial,management?,,,ANS,-To,maximize,shareholder,wealth.
1.5,What,is,the,Agency,Problem?
What,is,Agency,Cost?,,,ANS,--
Agency,problems,are,possible,when,management,and,owners,are,different.,Principal,(owner),hires,anoth
er,(agent),to,represent,their,interests.
-Management,can,have,different,goals,than,owners.
-Agency,cost,refers,to,cost,of,conflict,of,interest,between,stockholders,and,management.
1.5,What,helps,managers,stay,inline,with,owners,interests?,,,ANS,-Very,carefully-
tailored,compensation,packages,,e.g.,stock,options,or,RSU's.
1.5,What,are,the,two,regulatory,frameworks,for,public,trading,of,securities,and,what,did,they,set,up?,,,AN
S,----Securities,Act,of,1933
issuance,of,new,securities,(1933)
-registration,statement,made,publicly,available,via,SEC
---Securities,Exchange,act,of,1934
-creation,of,SEC,and,reporting,requirements
-Annual,public,reports
insider,trading,rules
1.5,What,is,Sarbanes-Oxley,(2002)?,,,ANS,---
in,response,to,scandals,at,Enron,,WorldCom,,Tyco,,Adelphia,,etc.
--increased,reporting,requirements,and,responsibility,of,corporate,directors.
e.g.,personal,attestation,of,accuracy,of,financial,statements,by,CEO
--audit,requirements
--no,loans,to,officers,of,company,from,company,(WorldCom)
--
In,essence,,makes,company,management,responsible,for,accuracy,of,the,company's,financial,statements.
--Negative,consequences
, some,companies,delisted,because,of,cost,of,compliance,(auditing,,etc.)
some,companies,listed,in,other,countries,on,their,exchanges,,e.g.,London's,AIM,(Alternative,Investment,
Market)
1.6,Summary:,What,are,3,basic,questions,financial,managers,must,answer?,,,ANS,-1-
Where,and,when,to,invest?,(Capital,Budgeting).
2-How,do,I,finance,it?,(Capital,Structure).,
3-Short-term,cash,management,(working,capital,management).
1-,A,firm's,capital,structure,refers,to,the,firm's:
---mixture,of,various,types,of,production,equipment.
---investment,selections,for,its,excess,cash,reserves.
---combination,of,cash,and,cash,equivalents.
---combination,of,accounts,appearing,on,the,left,side,of,its,balance,sheet.
---proportions,of,financing,from,current,and,long-term,debt,and,equity.,,,ANS,-
proportions,of,financing,from,current,and,long-term,debt,and,equity.
1-,Which,one,of,the,following,business,types,is,best,suited,to,raising,large,amounts,of,capital?
---Sole,proprietorship
---Limited,liability,company
----Corporation
---General,partnership
---Limited,partnership,,,ANS,-Corporation
1-,One,disadvantage,of,the,corporate,form,of,business,ownership,is,the:
---limited,liability,protection,provided,for,all,owners.
---firm's,ability,to,raise,cash.
---unlimited,life,of,the,firm.
---difficulties,encountered,when,changing,ownership.
AND ANSWERS 2024 – 2025 UPDATED.
1.1,Which,is,Capital,Structure,vs.,Capital,Budgeting?
A-smart,financing,decisions
"proportions,of,the,firm's,financing,from,current,and,long-term,debt,and,equity."
B-value-creating,projects.
"Process,of,making,and,managing,expenditure,on,long-lived,assets.",,,ANS,-Capital,Structure:,A
Capital,Budgeting:,B
1.1,What,is,Net,Working,Capital?,,,ANS,-Current,assets,minus,current,liabilities.
1.1,What,is,the,role,of,the,Controller,vs.,Treasurer?
A-manages,the,cash,flows,,managing,capital,expenditure,decisions,,and,making,financial,plans.
B-Accounting,,which,includes,taxes,,cost,and,financial,accounting,,and,information,systems.,,,ANS,-
Treasurer:,A
Controller:,B
1.2,State,the,following,about,sole,proprietorship,,partnership,,LLC,,and,corporation:
-How,many,people?
-Limited,or,unlimited,liability?
-Corporate,tax?
-Life,of,entity,limited?
-Transferability,easy,or,difficult?
,-Taxed,double?,,,ANS,-3,forms,of,business,organization
----Sole,proprietorship
-one,person
-unlimited,liability
-simple
-life,limited,to,life,of,proprietor
-no,corporate,tax.,Taxes,are,all,personal,taxes,of,owner.
-----Partnership
-unlimited,liability
-more,than,one,person.
-partnership,agreement.
-transferability,(liquidity,of,partner's,investment),is,difficult
-
general,partnership,means,all,partners,share,some,fraction,of,work,and,cash,and,to,share,profits,and,loss
es.
-Limited,partnership,limits,liabilities,of,some,partners,to,be,the,amount,of,cash,they've,contributed.,-
Usually,don't,participate,in,managing,the,business.
no,corporate,tax.,
-Taxes,are,individual.
----Corporation
-limited,liability
-individual,shares,of,ownership
-separated,ownership,of,organization,from,management
-
Corps,are,basically,individuals.,They,can,buy,and,sell,,sue,and,be,sued,,enter,into,contracts.,But,they,live,f
orever.,For,jurisdictional,purposes,,the,corporation,is,a,citizen,of,its,state,of,incorporation.
-Because,a,corporation,is,thought,of,as,a,person,it,pays,tax,(corporate,tax).
-Corporate,earnings,are,taxed,double,(earnings,by,company,and,dividends,by,shareholders).
-Each,share,gets,1,vote.
Shareholders,elect,a,board,of,directors,,who,in,turn,select,top,management.
,1.4,What,is,the,goal,of,financial,management?,,,ANS,-To,maximize,shareholder,wealth.
1.5,What,is,the,Agency,Problem?
What,is,Agency,Cost?,,,ANS,--
Agency,problems,are,possible,when,management,and,owners,are,different.,Principal,(owner),hires,anoth
er,(agent),to,represent,their,interests.
-Management,can,have,different,goals,than,owners.
-Agency,cost,refers,to,cost,of,conflict,of,interest,between,stockholders,and,management.
1.5,What,helps,managers,stay,inline,with,owners,interests?,,,ANS,-Very,carefully-
tailored,compensation,packages,,e.g.,stock,options,or,RSU's.
1.5,What,are,the,two,regulatory,frameworks,for,public,trading,of,securities,and,what,did,they,set,up?,,,AN
S,----Securities,Act,of,1933
issuance,of,new,securities,(1933)
-registration,statement,made,publicly,available,via,SEC
---Securities,Exchange,act,of,1934
-creation,of,SEC,and,reporting,requirements
-Annual,public,reports
insider,trading,rules
1.5,What,is,Sarbanes-Oxley,(2002)?,,,ANS,---
in,response,to,scandals,at,Enron,,WorldCom,,Tyco,,Adelphia,,etc.
--increased,reporting,requirements,and,responsibility,of,corporate,directors.
e.g.,personal,attestation,of,accuracy,of,financial,statements,by,CEO
--audit,requirements
--no,loans,to,officers,of,company,from,company,(WorldCom)
--
In,essence,,makes,company,management,responsible,for,accuracy,of,the,company's,financial,statements.
--Negative,consequences
, some,companies,delisted,because,of,cost,of,compliance,(auditing,,etc.)
some,companies,listed,in,other,countries,on,their,exchanges,,e.g.,London's,AIM,(Alternative,Investment,
Market)
1.6,Summary:,What,are,3,basic,questions,financial,managers,must,answer?,,,ANS,-1-
Where,and,when,to,invest?,(Capital,Budgeting).
2-How,do,I,finance,it?,(Capital,Structure).,
3-Short-term,cash,management,(working,capital,management).
1-,A,firm's,capital,structure,refers,to,the,firm's:
---mixture,of,various,types,of,production,equipment.
---investment,selections,for,its,excess,cash,reserves.
---combination,of,cash,and,cash,equivalents.
---combination,of,accounts,appearing,on,the,left,side,of,its,balance,sheet.
---proportions,of,financing,from,current,and,long-term,debt,and,equity.,,,ANS,-
proportions,of,financing,from,current,and,long-term,debt,and,equity.
1-,Which,one,of,the,following,business,types,is,best,suited,to,raising,large,amounts,of,capital?
---Sole,proprietorship
---Limited,liability,company
----Corporation
---General,partnership
---Limited,partnership,,,ANS,-Corporation
1-,One,disadvantage,of,the,corporate,form,of,business,ownership,is,the:
---limited,liability,protection,provided,for,all,owners.
---firm's,ability,to,raise,cash.
---unlimited,life,of,the,firm.
---difficulties,encountered,when,changing,ownership.
