CORPORATE FINANCE EXAM REVIEW
QUESTIONS AND ANSWERS
What is information asymmetry? - ANSWER-There is limited information about
something which tempers the decision that you can make.
What is the accounting balance sheet? - ANSWER-The balance sheet shows the value
of the firm;s assets and liabilities at a particular point in time (from an accounting
perspective).
Assets indicate what a firm owns.
Liabilities indicate what a firm owes.
What is the value of a company? - ANSWER-Total Debt + Equity = The value of a
company
What implications does a tax system have for capital structure and payout policies? -
ANSWER-Taxes can have a significant impact on financial decisions.
Corporate tax laws allow for deduction of expenses i.e. tax shelters.
Debt increases the amount of cash flow that is coming from the company, it is not a bad
thing. It is something that management has spent a lot of time thinking and talking
about.
What is the efficient market hypothesis? - ANSWER-Looking at the past will not give us
a definite answer for the future.
All publicly available information is shared into the stock prices.
What is behavioral finance: - ANSWER-People do not always act rationally.
Eg: The internet bubble, stocks selling at hundreds of times their earnings
Why is ryanair so valuable? - ANSWER-It is considered valuable because of prospects
for growth.
Investors are paying now, for anticipated future growth.
For example, capacity increase targets from 135 million to 250 million passengers.
Give 4 examples of the time value of money - ANSWER-Future Values
Present Values
Perpetuities
Annuities
What is a perpetuity? - ANSWER-A perpetuity is an infinite series of nominally equal
cash flows that occur at regular intervals forever, with a constant discount rate.
What is an annuity - ANSWER-An annuity is a series of nominally equal cash flows,
paid or received on a regular basis over a finite period with a constant discount rate, r.
, It is assumed that the payments are made or received at the end of each period.
What is a bond - ANSWER-Security that obligates the issuer to make specified
payments to the bond holder.
What is a coupon - ANSWER-The interest payments made to the bond holder.
What is a coupon rate - ANSWER-Annual interest payment, as a percentage of face
value.
What is the difference between a coupon rate and a discount rate? - ANSWER-The
coupon rate IS NOT the discount rate used in the present value calculations.
The coupon rate merely tells us what cash flow the bond will produce.
Since the coupon rate is listed as a % this misconception is quite common.
How is a bond valued? - ANSWER-The price of a bond is the present value of all cash
flows generated by the bond (i.e. coupons and face value) discounted at the required
rate of return.
What does yield to maturity mean - ANSWER-The percentage return on a bond if the
investor buys it and holds it to maturity.
Alternatively, the discount rate that sets the anticipated discounted future cash flow
equal to the current price.
What is a common stock - ANSWER-Ownership shares in a publicly held corporation.
What is a primary market used for? - ANSWER-For the sale of new stock.
What is an IPO - ANSWER-First offering of stock to the general public.
What is a seasoned issue? - ANSWER-Sale of new shares by a firm that has already
been through an IPO
What is a secondary market used for - ANSWER-For trading of previously issued
securities.
Give 4 ways that common stocks are valued - ANSWER-Book value, P/E Ratio, Market
Value Balance Sheet and Dividends.
What does book value mean - ANSWER-Net worth of the firm according to the balance
sheet.
What does P/E ratio mean? - ANSWER-Price per share dividend by earnings per share.
What is the market value balance sheet? - ANSWER-Financial Statement that uses
market value of assets and liabilities.
QUESTIONS AND ANSWERS
What is information asymmetry? - ANSWER-There is limited information about
something which tempers the decision that you can make.
What is the accounting balance sheet? - ANSWER-The balance sheet shows the value
of the firm;s assets and liabilities at a particular point in time (from an accounting
perspective).
Assets indicate what a firm owns.
Liabilities indicate what a firm owes.
What is the value of a company? - ANSWER-Total Debt + Equity = The value of a
company
What implications does a tax system have for capital structure and payout policies? -
ANSWER-Taxes can have a significant impact on financial decisions.
Corporate tax laws allow for deduction of expenses i.e. tax shelters.
Debt increases the amount of cash flow that is coming from the company, it is not a bad
thing. It is something that management has spent a lot of time thinking and talking
about.
What is the efficient market hypothesis? - ANSWER-Looking at the past will not give us
a definite answer for the future.
All publicly available information is shared into the stock prices.
What is behavioral finance: - ANSWER-People do not always act rationally.
Eg: The internet bubble, stocks selling at hundreds of times their earnings
Why is ryanair so valuable? - ANSWER-It is considered valuable because of prospects
for growth.
Investors are paying now, for anticipated future growth.
For example, capacity increase targets from 135 million to 250 million passengers.
Give 4 examples of the time value of money - ANSWER-Future Values
Present Values
Perpetuities
Annuities
What is a perpetuity? - ANSWER-A perpetuity is an infinite series of nominally equal
cash flows that occur at regular intervals forever, with a constant discount rate.
What is an annuity - ANSWER-An annuity is a series of nominally equal cash flows,
paid or received on a regular basis over a finite period with a constant discount rate, r.
, It is assumed that the payments are made or received at the end of each period.
What is a bond - ANSWER-Security that obligates the issuer to make specified
payments to the bond holder.
What is a coupon - ANSWER-The interest payments made to the bond holder.
What is a coupon rate - ANSWER-Annual interest payment, as a percentage of face
value.
What is the difference between a coupon rate and a discount rate? - ANSWER-The
coupon rate IS NOT the discount rate used in the present value calculations.
The coupon rate merely tells us what cash flow the bond will produce.
Since the coupon rate is listed as a % this misconception is quite common.
How is a bond valued? - ANSWER-The price of a bond is the present value of all cash
flows generated by the bond (i.e. coupons and face value) discounted at the required
rate of return.
What does yield to maturity mean - ANSWER-The percentage return on a bond if the
investor buys it and holds it to maturity.
Alternatively, the discount rate that sets the anticipated discounted future cash flow
equal to the current price.
What is a common stock - ANSWER-Ownership shares in a publicly held corporation.
What is a primary market used for? - ANSWER-For the sale of new stock.
What is an IPO - ANSWER-First offering of stock to the general public.
What is a seasoned issue? - ANSWER-Sale of new shares by a firm that has already
been through an IPO
What is a secondary market used for - ANSWER-For trading of previously issued
securities.
Give 4 ways that common stocks are valued - ANSWER-Book value, P/E Ratio, Market
Value Balance Sheet and Dividends.
What does book value mean - ANSWER-Net worth of the firm according to the balance
sheet.
What does P/E ratio mean? - ANSWER-Price per share dividend by earnings per share.
What is the market value balance sheet? - ANSWER-Financial Statement that uses
market value of assets and liabilities.
