Fundamentals of Corporate Finance and
Governance TEST BANK STUDY GUIDE
2025/2026 COMPLETE QUESTIONS AND CORRECT
DETAILED ANSWERS WITH RATIONALES ||
ALREADY GRADED A+
<NEWEST VERSION>
1. Definition of Corporate Finance - ANSWER ✔ the study of the relationship
between business decisions and the value of the stock in the business
2. Capital Budgeting - ANSWER ✔ the process of planning and managing a
firm's long-term investments
3. Capital Structure (or Financial Structure) - ANSWER ✔ the mixture of long-
term debt and equity maintained by a firm to finance its operations
4. Working Capital - ANSWER ✔ a firm's short-term assets (ie cash,
inventory) and liabilities (ie accounts payable to suppliers)
5. What is the capital budgeting decision? - ANSWER ✔ the acquisition of
long-term investments. the value of the cash flow generated by an asset
exceeds the cost of that asset.
6. Sole Proprietorship - ANSWER ✔ business owned by a single individual.
PROs: easy and inexpensive to form, individual retains all profits
7. CONs: individual has unlimited liability to debt, the organization is limited
to the life of the owner, capital is often limited to owner's personal wealth
8. Partnership (2 types) - ANSWER ✔ business formed by 2 or more
individuals or entities.
general: partners receive equal profits and liability
, limited: one or more of the partners will be subject to liability, others will be
limited but not actively involved in management. division of profits is
relative.
9. Corporation - ANSWER ✔ business created as a distinct legal entity
composed of one or more individuals or entities; a legal "person" separate
and distinct from its owners; complicated to form, subject to taxes
10.LLC - ANSWER ✔ hybrid of partnership and corporation. operates and
taxed like a partnership but retains limited liability for owners, IRS may
double tax if too 'corporation-like'
11.Why is the corporate form of business organization superior when it comes
to raising cash? - ANSWER ✔ ease of transferring ownership, limited
liability to debt, unlimited life of the business
12.Goal of Financial Management - ANSWER ✔ to maximize the current value
per share fo the existing stock
13.Corporate Finance (defined) - ANSWER ✔ the study of the relationship
between business decisions and the value of the stock in the business
14.What are some of the shortcomings of the goal of profit maximization? -
ANSWER ✔ profit is a vague term, this goal fails to consider whether short-
run or long-run profit maximization is being considered
15.Sarbanes-Oxley - ANSWER ✔ AKA "Sarbox" was enacted to protect
investors from corporate abuses. among other things, it requires an auditor-
and officer-approved assessment of the company's internal control structure
and financial reporting in their annual report.
16.What is an agency relationship? - ANSWER ✔ Exists whenever someone
(the principal) hires another (the agent) to represent his or her interests. In a
corporation, the stockholders are the principal, and management is the agent
of the stockholders.
,17.Reverse Merger - ANSWER ✔ Another acquisition deal known as a ____
enables a private company to become publicly listed in a relatively short
time period.
18.Reverse mergers - ANSWER ✔ It occur when a private company that has
strong prospects and is eager to acquire financing buys a publicly listed shell
company with no legitimate business operations and limited assets.
19.Price-to-earnings ratio (P/E ratio) - ANSWER ✔ With the use of a _____ ,
an acquiring company makes an offer that is a multiple of the earnings of the
target company.
20.Enterprise-value-to-sales ratio - ANSWER ✔ With an ______, the acquiring
company makes an offer as a multiple of the revenues while being aware of
the price-to-sales (P/S ratio) of other companies in the industry.
21.Discounted cash flow (DFC) analysis - ANSWER ✔ It determines a
company's current value, according to its estimated future cash flows.
22.Competition and Growth - ANSWER ✔ Two key drivers of capitalism:
23.Hostile takeovers - ANSWER ✔ Unfriendly acquisitions, commonly known
as_____, occur when the target company does not consent to the acquisition.
24.Corporate governance - ANSWER ✔ It is the system of rules, practices, and
processes by which a company is directed and controlled.
25.Corporate governance - ANSWER ✔ It essentially involves balancing the
interests of a company's many stakeholders, which can include shareholders,
senior management, customers, suppliers, lenders, the government, and the
community.
26.Governance - ANSWER ✔ It refers to the set of rules, controls, policies, and
resolutions put in place to direct corporate behavior.
27.Financial break-even - ANSWER ✔ Financial break even
NPV solved=0, OCF* for NPV=0
Q=(FC+OCF*)/ (P-v)
, v=variable cost per unit
28.General Break-Even - ANSWER ✔ Q=(FC+OCF) /(P-v)
29.Constant Growth Model (infinite) - ANSWER ✔ a widely cited dividend
valuation approach that assumes that dividends will grow at a constant rate,
but a rate that is less than the required return
30.Constant Growth Model (finite) - ANSWER ✔ Should include terminal
value (what you sell it for) @ end
31.To do so you calculate the non-constant growth rate until horizon date
T...then calculate the terminal value as you would in an infinite CGM w/
denominator raised to power T
32.Expected rate of return (constant growth model) - ANSWER ✔ The rate of
return expected to be realized from an investment; the weighted average of
the probability distribution of possible results
33.Capital gains yield - ANSWER ✔ the dividend growth rate, or the rate at
which the value of an investment grows
34.Dividend Yield - ANSWER ✔ a stock's expected cash dividend divided by
its current price
35.Terminal value (Horizon Value) - ANSWER ✔ the sale price at the end of
the expected holding period
36.Perpetual Growth Method - ANSWER ✔ dividing the last cash flow forecast
by the difference between the discount rate and terminal growth rate. The
terminal value calculation estimates the value of the company after the
forecast period.
(FCF * (1 + g)) / (d - g)
37.Free Cash Flow Valuation Model - ANSWER ✔ A model that determines
the value of an entire company as the present value of its expected free cash
Governance TEST BANK STUDY GUIDE
2025/2026 COMPLETE QUESTIONS AND CORRECT
DETAILED ANSWERS WITH RATIONALES ||
ALREADY GRADED A+
<NEWEST VERSION>
1. Definition of Corporate Finance - ANSWER ✔ the study of the relationship
between business decisions and the value of the stock in the business
2. Capital Budgeting - ANSWER ✔ the process of planning and managing a
firm's long-term investments
3. Capital Structure (or Financial Structure) - ANSWER ✔ the mixture of long-
term debt and equity maintained by a firm to finance its operations
4. Working Capital - ANSWER ✔ a firm's short-term assets (ie cash,
inventory) and liabilities (ie accounts payable to suppliers)
5. What is the capital budgeting decision? - ANSWER ✔ the acquisition of
long-term investments. the value of the cash flow generated by an asset
exceeds the cost of that asset.
6. Sole Proprietorship - ANSWER ✔ business owned by a single individual.
PROs: easy and inexpensive to form, individual retains all profits
7. CONs: individual has unlimited liability to debt, the organization is limited
to the life of the owner, capital is often limited to owner's personal wealth
8. Partnership (2 types) - ANSWER ✔ business formed by 2 or more
individuals or entities.
general: partners receive equal profits and liability
, limited: one or more of the partners will be subject to liability, others will be
limited but not actively involved in management. division of profits is
relative.
9. Corporation - ANSWER ✔ business created as a distinct legal entity
composed of one or more individuals or entities; a legal "person" separate
and distinct from its owners; complicated to form, subject to taxes
10.LLC - ANSWER ✔ hybrid of partnership and corporation. operates and
taxed like a partnership but retains limited liability for owners, IRS may
double tax if too 'corporation-like'
11.Why is the corporate form of business organization superior when it comes
to raising cash? - ANSWER ✔ ease of transferring ownership, limited
liability to debt, unlimited life of the business
12.Goal of Financial Management - ANSWER ✔ to maximize the current value
per share fo the existing stock
13.Corporate Finance (defined) - ANSWER ✔ the study of the relationship
between business decisions and the value of the stock in the business
14.What are some of the shortcomings of the goal of profit maximization? -
ANSWER ✔ profit is a vague term, this goal fails to consider whether short-
run or long-run profit maximization is being considered
15.Sarbanes-Oxley - ANSWER ✔ AKA "Sarbox" was enacted to protect
investors from corporate abuses. among other things, it requires an auditor-
and officer-approved assessment of the company's internal control structure
and financial reporting in their annual report.
16.What is an agency relationship? - ANSWER ✔ Exists whenever someone
(the principal) hires another (the agent) to represent his or her interests. In a
corporation, the stockholders are the principal, and management is the agent
of the stockholders.
,17.Reverse Merger - ANSWER ✔ Another acquisition deal known as a ____
enables a private company to become publicly listed in a relatively short
time period.
18.Reverse mergers - ANSWER ✔ It occur when a private company that has
strong prospects and is eager to acquire financing buys a publicly listed shell
company with no legitimate business operations and limited assets.
19.Price-to-earnings ratio (P/E ratio) - ANSWER ✔ With the use of a _____ ,
an acquiring company makes an offer that is a multiple of the earnings of the
target company.
20.Enterprise-value-to-sales ratio - ANSWER ✔ With an ______, the acquiring
company makes an offer as a multiple of the revenues while being aware of
the price-to-sales (P/S ratio) of other companies in the industry.
21.Discounted cash flow (DFC) analysis - ANSWER ✔ It determines a
company's current value, according to its estimated future cash flows.
22.Competition and Growth - ANSWER ✔ Two key drivers of capitalism:
23.Hostile takeovers - ANSWER ✔ Unfriendly acquisitions, commonly known
as_____, occur when the target company does not consent to the acquisition.
24.Corporate governance - ANSWER ✔ It is the system of rules, practices, and
processes by which a company is directed and controlled.
25.Corporate governance - ANSWER ✔ It essentially involves balancing the
interests of a company's many stakeholders, which can include shareholders,
senior management, customers, suppliers, lenders, the government, and the
community.
26.Governance - ANSWER ✔ It refers to the set of rules, controls, policies, and
resolutions put in place to direct corporate behavior.
27.Financial break-even - ANSWER ✔ Financial break even
NPV solved=0, OCF* for NPV=0
Q=(FC+OCF*)/ (P-v)
, v=variable cost per unit
28.General Break-Even - ANSWER ✔ Q=(FC+OCF) /(P-v)
29.Constant Growth Model (infinite) - ANSWER ✔ a widely cited dividend
valuation approach that assumes that dividends will grow at a constant rate,
but a rate that is less than the required return
30.Constant Growth Model (finite) - ANSWER ✔ Should include terminal
value (what you sell it for) @ end
31.To do so you calculate the non-constant growth rate until horizon date
T...then calculate the terminal value as you would in an infinite CGM w/
denominator raised to power T
32.Expected rate of return (constant growth model) - ANSWER ✔ The rate of
return expected to be realized from an investment; the weighted average of
the probability distribution of possible results
33.Capital gains yield - ANSWER ✔ the dividend growth rate, or the rate at
which the value of an investment grows
34.Dividend Yield - ANSWER ✔ a stock's expected cash dividend divided by
its current price
35.Terminal value (Horizon Value) - ANSWER ✔ the sale price at the end of
the expected holding period
36.Perpetual Growth Method - ANSWER ✔ dividing the last cash flow forecast
by the difference between the discount rate and terminal growth rate. The
terminal value calculation estimates the value of the company after the
forecast period.
(FCF * (1 + g)) / (d - g)
37.Free Cash Flow Valuation Model - ANSWER ✔ A model that determines
the value of an entire company as the present value of its expected free cash
