Corporate Finance Exam 1 Review
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Investors buy debt or equity of the Firm with cash:
Financing Decision - how should the firm raise the cash/capital to pay for the firm's assets?
External finance involves selling a financial claim - why choose debt or equity?
Debt - a contractual claim entitles investor to receive fixed interest payments at specified dates
Equity - a residual claim entitles ownership in firm
Who gets "paid" first? - CORRECT ANSWER - Depends. If the Firm is healthy, and they
are able to make their interest payments, the Firm can decide to use cash to pay bond holders or
equity holders. The Firm can pay equity holders dividends, repurchase shares, repurchase debt,
etc. If the company cannot pay interest payments, and they default or go into bankruptcy, then
the debt holders have the contractual claim and will be paid first. If anything is leftover, the
residual claim goes to equity holders.
Investment Decision - what real assets do we want to purchase with the cash?
Operating Decision - how should the firm use assets in each period?
What is the most important relationship between Investing and Operating decisions? -
CORRECT ANSWER - Capital Budgeting. Process of making and managing expenditures
on long-lived assets. Depending on the business, the Firm must decide the amount of return on
their investment that they need. The Firm invests cash in Assets and generates cash or a return on
that investment. We will talk about this much more later in this class.
4a) Firm reinvests cash in the Firm's Operations
4b) Firm pays out cash to investors
Payout Decision - how should the Firm divide up operating cash flows into cash distributed to
investors and cash reinvested in the firm's operations and assets
Is this a cash inflow or outflow? - CORRECT ANSWER - Depends. Cash outflow if the
Firm decides to payout cash to investors. Neither Cash Inflow nor Cash Outflow if the firm
decides to reinvest all of the cash into the Firm's Operations because that Cash Inflow is already
captured by #3
, Firm Manager Objectives: What is the manager's primary objective? - CORRECT
ANSWER - Maximize the equity value of the Firm. Stockholders are the residual owners,
so they are only entitled to what is left after employees, suppliers, and creditors (and everyone
else with legitimate claims) are paid what they are due. If equity value of the Firm is maximized,
everyone else should also be okay.
What is Net Working Capital from an operating cash flow perspective? - CORRECT
ANSWER - (Current Assets less Cash) - (Current Liabilities less Short-term Debt)
What are the five key strategic financial decisions that a firm must make? - CORRECT
ANSWER - Financing, Investing, Operating, Payout, Liquidity
Finance Interview Question: How does a $10mm increase in Depreciation flow through the three
financial statements?
Assume 30% tax rate - CORRECT ANSWER - Net Income decreases by $7m, Cash Flow
from Operations increases by $3m, Cash is up $3m, Net PP&E down $10m, Retained Earnings
down $7m.
Where is Cost of Goods Sold (COGS)? - CORRECT ANSWER - Other Costs of Revenue.
Intuit does not purchase goods like a manufacturing or consumer firm. They are a subscription
software company, so they have Other Costs of Revenue.
What is EBIT? How would it be calculated using this information? - CORRECT
ANSWER - Earnings Before Interest and Taxes = Operating Income + Other, net.
Important number when we start to think about cash flows. Could also be calculated as Net
Income + Interest Expense + Income Tax Provision.
Where is Depreciation and Amortization? - CORRECT ANSWER - Included in another
income statement line item: Other Costs of Revenue if production facilities; General and
Administrative if company headquarters.
Identify asset depreciated to determine expense allocation
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Investors buy debt or equity of the Firm with cash:
Financing Decision - how should the firm raise the cash/capital to pay for the firm's assets?
External finance involves selling a financial claim - why choose debt or equity?
Debt - a contractual claim entitles investor to receive fixed interest payments at specified dates
Equity - a residual claim entitles ownership in firm
Who gets "paid" first? - CORRECT ANSWER - Depends. If the Firm is healthy, and they
are able to make their interest payments, the Firm can decide to use cash to pay bond holders or
equity holders. The Firm can pay equity holders dividends, repurchase shares, repurchase debt,
etc. If the company cannot pay interest payments, and they default or go into bankruptcy, then
the debt holders have the contractual claim and will be paid first. If anything is leftover, the
residual claim goes to equity holders.
Investment Decision - what real assets do we want to purchase with the cash?
Operating Decision - how should the firm use assets in each period?
What is the most important relationship between Investing and Operating decisions? -
CORRECT ANSWER - Capital Budgeting. Process of making and managing expenditures
on long-lived assets. Depending on the business, the Firm must decide the amount of return on
their investment that they need. The Firm invests cash in Assets and generates cash or a return on
that investment. We will talk about this much more later in this class.
4a) Firm reinvests cash in the Firm's Operations
4b) Firm pays out cash to investors
Payout Decision - how should the Firm divide up operating cash flows into cash distributed to
investors and cash reinvested in the firm's operations and assets
Is this a cash inflow or outflow? - CORRECT ANSWER - Depends. Cash outflow if the
Firm decides to payout cash to investors. Neither Cash Inflow nor Cash Outflow if the firm
decides to reinvest all of the cash into the Firm's Operations because that Cash Inflow is already
captured by #3
, Firm Manager Objectives: What is the manager's primary objective? - CORRECT
ANSWER - Maximize the equity value of the Firm. Stockholders are the residual owners,
so they are only entitled to what is left after employees, suppliers, and creditors (and everyone
else with legitimate claims) are paid what they are due. If equity value of the Firm is maximized,
everyone else should also be okay.
What is Net Working Capital from an operating cash flow perspective? - CORRECT
ANSWER - (Current Assets less Cash) - (Current Liabilities less Short-term Debt)
What are the five key strategic financial decisions that a firm must make? - CORRECT
ANSWER - Financing, Investing, Operating, Payout, Liquidity
Finance Interview Question: How does a $10mm increase in Depreciation flow through the three
financial statements?
Assume 30% tax rate - CORRECT ANSWER - Net Income decreases by $7m, Cash Flow
from Operations increases by $3m, Cash is up $3m, Net PP&E down $10m, Retained Earnings
down $7m.
Where is Cost of Goods Sold (COGS)? - CORRECT ANSWER - Other Costs of Revenue.
Intuit does not purchase goods like a manufacturing or consumer firm. They are a subscription
software company, so they have Other Costs of Revenue.
What is EBIT? How would it be calculated using this information? - CORRECT
ANSWER - Earnings Before Interest and Taxes = Operating Income + Other, net.
Important number when we start to think about cash flows. Could also be calculated as Net
Income + Interest Expense + Income Tax Provision.
Where is Depreciation and Amortization? - CORRECT ANSWER - Included in another
income statement line item: Other Costs of Revenue if production facilities; General and
Administrative if company headquarters.
Identify asset depreciated to determine expense allocation
