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Questions and Answers
Which of the following best describes the primary focus of capital budgeting?
Which of the following best describes the primary focus of capital budgeting?
- Determining the optimal mix of debt and equity financing.
- Evaluating the size, timing, and risk of future cash flows from potential investments. (correct)
- Ensuring that the firm complies with the Sarbanes-Oxley Act.
- Managing short-term assets and liabilities.
What is a significant disadvantage of a sole proprietorship?
What is a significant disadvantage of a sole proprietorship?
- Complex regulatory requirements.
- Limited liability for the owner.
- Difficulty in raising large amounts of capital. (correct)
- Double taxation of profits.
In the context of corporate finance, the agency problem refers to:
In the context of corporate finance, the agency problem refers to:
- The conflict between different departments within the company.
- The legal issues with the Sarbanes-Oxley Act.
- The conflict between the firm's short-term and long-term financial goals.
- The conflict of interest between stockholders and managers. (correct)
A company has a total taxable income of $1,000,000 and pays total taxes of $210,000. What is the average tax rate?
A company has a total taxable income of $1,000,000 and pays total taxes of $210,000. What is the average tax rate?
Which of the following is a key difference between a corporation and a partnership?
Which of the following is a key difference between a corporation and a partnership?
A financial manager is analyzing the impact of a potential decrease in sales on the company's financial statements. Which forecasting tool would be most appropriate?
A financial manager is analyzing the impact of a potential decrease in sales on the company's financial statements. Which forecasting tool would be most appropriate?
Which of the following best describes the purpose of using a 'balancing item' in financial planning?
Which of the following best describes the purpose of using a 'balancing item' in financial planning?
What is the primary goal of financial management?
What is the primary goal of financial management?
Flashcards
Goal of Financial Management
Goal of Financial Management
The primary goal of financial management is to increase the value of the company for its shareholders by maximizing the price of its stock.
Agency Problem
Agency Problem
A conflict of interest arises when managers (agents) prioritize their own interests over those of the company's owners (principals), potentially harming shareholder value.
Sarbanes-Oxley Act
Sarbanes-Oxley Act
A legal framework implemented in 2002 aimed at improving corporate governance by demanding greater transparency, accountability, and ethical conduct from publicly traded companies.
Average Tax Rate
Average Tax Rate
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Marginal Tax Rate
Marginal Tax Rate
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Planning Horizons
Planning Horizons
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Sensitivity Analysis
Sensitivity Analysis
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Pro Forma Statements
Pro Forma Statements
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Study Notes
Corporate Finance Concepts
- Three Core Issues: Capital budgeting, capital structure, working capital management
- Capital Budgeting: Determining the best investment projects by examining the size, timing, and risk of future cash flows.
- Capital Structure: Finding the optimal mix of financing (debt vs. equity) to maximize firm value.
- Working Capital Management: Managing short-term assets and liabilities to ensure smooth day-to-day operations.
Business Structures
- Sole Proprietorship: Simple setup, profits taxed personally, unlimited liability, limited life, difficulty raising capital
- Partnership: General and limited partnerships exist, shared profits, taxed personally, general partners have unlimited liability, limited lifespan.
- Corporation: A separate legal entity established under state law, limited liability, easy ownership transfer, easier to raise capital, but faces double taxation and a more complex setup.
- Corporation vs. Partnership Comparison: Corporations offer liquidity via readily traded shares; partnerships have restricted transferability. Corporations provide limited liability for shareholders; partnerships offer unlimited liability for general partners. Corporations face double taxation; partnerships are taxed personally. Corporations have a potentially unlimited lifespan; partnerships have a limited lifespan.
Key Financial Concepts
- Goal of Financial Management: Maximize shareholder value (per share of existing stock).
- Agency Problem: Potential conflicts of interest between management (agents) and shareholders (principals).
- Sarbanes-Oxley Act (SOX): Improves corporate governance.
Taxation and Cash Flow
- Federal Corporate Tax Rate (2023): 21% (Tax Cuts and Jobs Act of 2017).
- Key Tax Concepts: Average tax rate (total taxes paid / total taxable income), marginal tax rate (taxes on the next dollar of income).
Financial Planning & Forecasting
- Planning Horizons: Short-term (one year) and long-term (three to five years).
- Forecasting Scenarios: Best-case, normal-case, worst-case.
- Forecasting Tools: Sensitivity analysis (testing impacts of variable changes).
- Key Financial Model Components: Pro forma statements (projected financial statements), plug item (required external financing)
- Financial Flexibility: Planning for future financing needs is crucial
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