CH.1 INTRODUCTION TO CORPORATE FINANCE
QUESTIONS AND ANSWERS UPDATED 2024 - 2025
What is the capital budgeting decision? ANS -In capital budgeting decision the financial manager tries
to identify investment opportunities that are worth more to the firm than they cost to acquire. That is,
the value of the cash flow generated by an asset exceeds the cost of that asset.
What do you call the specific mixture of long-term debt and equity that a firm chooses to use? ANS -
capital structure
Into what category of financial management does cash management fall? ANS -Working Capital----
short-term liabilities
What are the three forms of business organizations? ANS -1. Sole Proprietorship
2. Partnership
3.Corporation
What are the primary advantages and disadvantages of sole proprietorship and partnerships? ANS -
SOLE PROPRIETORSHIP: Advantages--Keeps all the profits. Disadvantages--unlimited liability for business
debts meaning creditors can look to the proprietor's personal assets for payment.
PARNTERSHIP: Disadvantages--unlimited liability for business debts on the part of the owners, limited
life of the business, difficulty of transferring ownership.= (central problem) the ability of such businesses
to grow can be seriously limited by an inability to raise cash for investment.
What is the difference b/w a general and a limited partnership? ANS -General Partnership--all the
partners share in gains or losses, an all have unlimited liability for all partnership debts, not just some
particular share.
Limited Partnership-- one or more general partners will run the business and have unlimited liability, but
there will be one or more limited partners who wil not actively participate in the business.
, Why is the corporate form superior when it comes to raising cash? ANS -for the relative ease of
transferring ownership, the limited liability for business debts, and the unlimited life of the business are
why the corporate form is superior for raising cash. Ex: a corp. needs new equity, it can then sell new
shares of stock and attract new investors.
What is the goal of financial management? ANS -the goal of financial management is to maximize the
current value per share of the existing stock. The financial manager acts in the shareholders' best
interests by making decisions that increase the value of the stock.
Can you give a definition of corporate finance? ANS -corporate finance is the study of the relationship
b/w business decisions and the value of the stock in the business.
What are some shortcomings(failures) of the goal of profit maximization? ANS -shareholders are
entitled to what is left over after employees, suppliers, and creditors are paid their due. If none is left
then shareholders are left w/ nothing.
What is an agency relationship? ANS -the relationship b/w stockholders and management.
What are agency problems and how do they come about? What are agency costs? ANS -AGENCY
COSTS: refers to the costs of the conflict of interest b/w stockholders and management. They can come
in 2 forms Indirect Agency Cost--lost opportunity, Direct Agency Cost 2 forms-- 1) corporate expenditure
that benefits management but cost steh stockholders (ex. purchase of a luxurious unneeded jet). 2)
expense taht arises frmo the need to monitor management actions (ex: paying outside auditors to
assess accuracy of financial statements.
What incentives do managers in large corporations have to maximize share value? ANS -1) managerial
compensation-- usu. tied to financial performance in general and often to share value in particular. ex:
managers are given the option to buy stock at a bargain price. 2) job prospects-- better performers
within the firm will get promoted.
What is a dealer market? How do a dealer and auction markets differ? ANS -dealers buy and sell for
themselves at their own risk, most of the buying and selling is done by the dealer. Auction market--1.has
a physical location (like wall st) 2. match those who wish to sell w/ those who wish to buy.
QUESTIONS AND ANSWERS UPDATED 2024 - 2025
What is the capital budgeting decision? ANS -In capital budgeting decision the financial manager tries
to identify investment opportunities that are worth more to the firm than they cost to acquire. That is,
the value of the cash flow generated by an asset exceeds the cost of that asset.
What do you call the specific mixture of long-term debt and equity that a firm chooses to use? ANS -
capital structure
Into what category of financial management does cash management fall? ANS -Working Capital----
short-term liabilities
What are the three forms of business organizations? ANS -1. Sole Proprietorship
2. Partnership
3.Corporation
What are the primary advantages and disadvantages of sole proprietorship and partnerships? ANS -
SOLE PROPRIETORSHIP: Advantages--Keeps all the profits. Disadvantages--unlimited liability for business
debts meaning creditors can look to the proprietor's personal assets for payment.
PARNTERSHIP: Disadvantages--unlimited liability for business debts on the part of the owners, limited
life of the business, difficulty of transferring ownership.= (central problem) the ability of such businesses
to grow can be seriously limited by an inability to raise cash for investment.
What is the difference b/w a general and a limited partnership? ANS -General Partnership--all the
partners share in gains or losses, an all have unlimited liability for all partnership debts, not just some
particular share.
Limited Partnership-- one or more general partners will run the business and have unlimited liability, but
there will be one or more limited partners who wil not actively participate in the business.
, Why is the corporate form superior when it comes to raising cash? ANS -for the relative ease of
transferring ownership, the limited liability for business debts, and the unlimited life of the business are
why the corporate form is superior for raising cash. Ex: a corp. needs new equity, it can then sell new
shares of stock and attract new investors.
What is the goal of financial management? ANS -the goal of financial management is to maximize the
current value per share of the existing stock. The financial manager acts in the shareholders' best
interests by making decisions that increase the value of the stock.
Can you give a definition of corporate finance? ANS -corporate finance is the study of the relationship
b/w business decisions and the value of the stock in the business.
What are some shortcomings(failures) of the goal of profit maximization? ANS -shareholders are
entitled to what is left over after employees, suppliers, and creditors are paid their due. If none is left
then shareholders are left w/ nothing.
What is an agency relationship? ANS -the relationship b/w stockholders and management.
What are agency problems and how do they come about? What are agency costs? ANS -AGENCY
COSTS: refers to the costs of the conflict of interest b/w stockholders and management. They can come
in 2 forms Indirect Agency Cost--lost opportunity, Direct Agency Cost 2 forms-- 1) corporate expenditure
that benefits management but cost steh stockholders (ex. purchase of a luxurious unneeded jet). 2)
expense taht arises frmo the need to monitor management actions (ex: paying outside auditors to
assess accuracy of financial statements.
What incentives do managers in large corporations have to maximize share value? ANS -1) managerial
compensation-- usu. tied to financial performance in general and often to share value in particular. ex:
managers are given the option to buy stock at a bargain price. 2) job prospects-- better performers
within the firm will get promoted.
What is a dealer market? How do a dealer and auction markets differ? ANS -dealers buy and sell for
themselves at their own risk, most of the buying and selling is done by the dealer. Auction market--1.has
a physical location (like wall st) 2. match those who wish to sell w/ those who wish to buy.
