Corporate Finance Basics
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Questions and Answers

What is capital budgeting primarily concerned with?

  • The mixture of long-term debt and equity.
  • Evaluating future cash flow size, timing, and risk. (correct)
  • Maximizing market share.
  • Choosing between various loan types.

What does capital budgeting primarily deal with?

  • Determining cash flow from operational activities
  • Planning long-term investments (correct)
  • Managing short-term liabilities and assets
  • Raising funds through stock issuance

Which factor does not directly influence a financial manager's capital structure decisions?

  • Amount the firm should borrow.
  • Risk associated with debt and equity mix.
  • Customer demand for products. (correct)
  • Cost of raising long-term financing.

Who is primarily responsible for making financial management decisions within a firm?

<p>The finance director or chief financial officer (CFO) (A)</p> Signup and view all the answers

What is the primary goal of financial management as stated?

<p>Maximize firm value. (D)</p> Signup and view all the answers

What does working capital management involve?

<p>Handling a firm's short-term assets and liabilities (A)</p> Signup and view all the answers

Which is a day-to-day responsibility of a financial manager?

<p>Managing the firm's working capital. (D)</p> Signup and view all the answers

Which of the following best describes the capital structure of a firm?

<p>The combination of short-term and long-term financing (C)</p> Signup and view all the answers

When making investment decisions, what must be true about the cash flows generated by an asset?

<p>They must exceed the cost of acquiring the asset (B)</p> Signup and view all the answers

Which goal may lead to complications for a financial manager?

<p>Beating the competition. (B)</p> Signup and view all the answers

What role does the treasurer's office play in a firm?

<p>Managing the firm’s cash and credit (A)</p> Signup and view all the answers

What does managing working capital help to ensure?

<p>Sufficient resources for daily operations. (C)</p> Signup and view all the answers

One key question a financial manager answers relates to?

<p>Where to obtain long-term financing for investments (A)</p> Signup and view all the answers

What does the mixture of debt and equity used by a firm affect?

<p>Risk and value of the firm. (C)</p> Signup and view all the answers

Which is a possible financial goal that might not align with maximizing firm value?

<p>Lowering prices to gain market share. (B)</p> Signup and view all the answers

Which of the following choices is an example of capital budgeting?

<p>Developing a new type of tablet computer (D)</p> Signup and view all the answers

What is the primary goal of financial management as described?

<p>Maximize the current value per share of existing equity (C)</p> Signup and view all the answers

Which of the following best describes the 'Triple Bottom Line' concept?

<p>Balancing financial profit with environmental and social concerns (B)</p> Signup and view all the answers

How do the goals relating to profitability generally conflict with goals relating to stability?

<p>Profit maximization involves taking on risk (D)</p> Signup and view all the answers

What challenge is associated with the Triple Bottom Line framework?

<p>Measuring a company's impact on society and the environment in monetary terms (B)</p> Signup and view all the answers

What type of goals do sales and market share fall under?

<p>Profitability goals (D)</p> Signup and view all the answers

Which statement expresses a common misconception about risk and profitability?

<p>Avoiding all risks guarantees stable profits (A)</p> Signup and view all the answers

What role does the financial manager play according to the content?

<p>Making decisions valued by shareholders (B)</p> Signup and view all the answers

What is the relationship between environmental goals and profitability?

<p>Profitability can be enhanced through sustainable practices (D)</p> Signup and view all the answers

What is the benefit of cash flows from the financial markets for a firm?

<p>It enables the firm to invest in assets. (A)</p> Signup and view all the answers

What happens to the cash generated by the firm's investments after paying corporate taxes?

<p>It is reinvested in the firm and returned to the financial markets. (C)</p> Signup and view all the answers

Which of the following is NOT a source of financing for a firm?

<p>Real Estate Sales (D)</p> Signup and view all the answers

In which market are securities sold for the first time?

<p>Primary market (B)</p> Signup and view all the answers

What is the role of financial institutions in the financial markets?

<p>To invest household savings into the financial markets. (B)</p> Signup and view all the answers

Which type of market involves the resale of existing securities?

<p>Secondary market (D)</p> Signup and view all the answers

What actions do households take that contribute to the financial markets?

<p>Saving money in banks and making insurance payments. (A)</p> Signup and view all the answers

Which statement best describes the relationship between shareholder wealth maximization and the triple bottom line approach?

<p>They can be aligned if shareholders share common objectives with the general population. (D)</p> Signup and view all the answers

What is a characteristic of a public offering?

<p>Must be registered with the securities regulator (B)</p> Signup and view all the answers

How do secondary markets enhance investor willingness to purchase securities?

<p>By allowing for the transfer of ownership after the original sale (A)</p> Signup and view all the answers

Which of the following statements accurately describes a dealer market?

<p>Dealers buy and sell securities at their own risk (D)</p> Signup and view all the answers

Which feature distinguishes an auction market from a dealer market?

<p>Auction markets primarily match buyers and sellers (C)</p> Signup and view all the answers

Where does most trading of debt securities take place?

<p>In dealer markets or over-the-counter markets (A)</p> Signup and view all the answers

Which of the following is true about auction markets?

<p>They have a primary purpose of obtaining the best price for securities (A)</p> Signup and view all the answers

What is a key difference between brokers and dealers in a market?

<p>Dealers take on the risk of trading securities (B)</p> Signup and view all the answers

What best characterizes a private placement?

<p>It is a negotiated sale to a specific buyer (D)</p> Signup and view all the answers

What must firms meet to be listed on an organized exchange?

<p>Certain minimum criteria concerning assets and shareholders (D)</p> Signup and view all the answers

Which of the following is NOT one of the macroeconomic policy groups used to support businesses?

<p>Investment Policy (B)</p> Signup and view all the answers

What effect do high interest rates typically have on borrowing and saving?

<p>They make borrowing more expensive and saving more beneficial (D)</p> Signup and view all the answers

What is the purpose of managing exchange rates in a country?

<p>To improve country trade competitiveness (D)</p> Signup and view all the answers

How do relatively low exchange rates affect exports and imports?

<p>They make exports cheaper and imports more expensive (B)</p> Signup and view all the answers

Which of the following statements about floating exchange rates is true?

<p>They fluctuate based on demand and supply of the currency (B)</p> Signup and view all the answers

What is one of the main characteristics of a well-governed economy?

<p>Productivity is growing and price levels are controlled (D)</p> Signup and view all the answers

Which aspect of fiscal policy theoretically reduces consumer spending?

<p>Increasing taxation (A)</p> Signup and view all the answers

Flashcards

Corporate Finance

The field of finance that focuses on the financial decisions made by corporations.

Capital Budgeting

The process of deciding whether long-term investments are worthwhile.

Capital Structure

How a company finances its investments by raising money (debt or equity).

Working Capital Management

Managing short-term assets and liabilities, like cash and accounts receivables.

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Investment Decisions

Evaluating if a project (investment) will increase a company's value.

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Financial Manager

The person/team in charge of financial decisions for a company.

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Balance Sheet Equation

Assets = Liabilities + Equity. A fundamental accounting equation.

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Finance Director/CFO

Top financial officer responsible for the whole finance department.

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Profit Maximization

A business goal to increase profits, sometimes aiming for long-term or average profits.

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Risk Control

The goal of minimizing business risks and potential losses, like bankruptcy.

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Triple Bottom Line

A business objective balancing profit with social and environmental considerations.

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Shareholder Value

The monetary worth of a company's equity, as perceived by shareholders, considering societal and environmental factors.

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Profit vs. Safety

A key conflict; maximizing profit often involves risks, and minimizing risk may limit profit.

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Environmental Goals

Business objectives related to sustainability and tackling climate change.

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Societal Goals

Business objectives tied to the company's impact on society, including employee welfare and community engagement.

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Measuring Social and Environmental Impact

Difficulty in expressing social and environmental effects in monetary units.

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Public Offering

Selling securities to the general public.

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Private Placement

Negotiated sale of securities to a specific buyer.

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Secondary Market

Trading of securities after the initial sale.

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Dealer Market

Secondary market where dealers buy/sell for themselves.

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Auction Market

Secondary market where buyers and sellers are matched.

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Over-the-Counter (OTC) Market

Dealer market for equities and debt securities without a central location.

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Primary Market Transaction

When a corporation sells securities to raise funds.

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Trading in Corporate Securities

Most large corporations' equity shares trade in organized auction markets.

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Shareholder Wealth Maximization

Making the most profit for shareholders, consistent with societal good, assuming shared values.

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Financial Markets

Places where money flows between borrowers and lenders; where financial decisions center.

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Primary Market

Market where new securities (e.g., stocks or bonds) are sold; initial offering.

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Secondary Market

Market where existing securities are traded; no new money for the issuer.

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Cash Flow

Money moving in and out of a firm.

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Sources of Financing

Ways a company raises capital (money): private investors, bank loans, equity, bonds, short-term financing.

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Corporate Taxes

Taxes a company pays on profit.

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Equity Financing

Raising capital by selling shares of ownership.

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Listed Securities

Securities traded on an organized exchange, meeting minimum criteria like asset size and shareholders.

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Globalization & Financial Markets

Globalized markets mean that investment trading is continuous as it moves across the world.

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Macroeconomic Policy

Government actions supporting businesses during challenging times.

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Monetary Policy

Government use of interest rates and money supply to impact the economy.

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Fiscal Policy

Government spending and taxes to influence the economy, reducing corporate spending.

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Exchange Rate Policy

Managing exchange rates to improve a country’s trade competitiveness.

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European Monetary Union

EU member countries combining their currencies into a single currency.

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Economic Environment (Support)

Government use of tools during challenging (like pandemic) times to aid businesses, categorized as macroeconomic policy, to boost productivity, control price levels, and generate employment.

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Capital Budgeting

Evaluating the size, timing, and risk of future cash flows for investments.

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Capital Structure

The mix of debt and equity used to finance a firm's operations.

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Working Capital Management

Managing a firm's short-term assets (inventory) and liabilities (supplier payments).

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Cash Flow Considerations

Financial managers must consider how much, when, and how likely cash will be received.

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Financial Management Goal

Maximizing firm value is the overriding goal of financial management.

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Goal Conflicts

Different goals in practice, such as survival, market share, or profits, can conflict with maximizing firm value.

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Financial Manager Responsibilities

Financial managers make decisions about capital structure and financing options.

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Importance of timing

Knowing when will cash will be received is an important part of measuring the future cash flows.

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Study Notes

Corporate Finance

  • Corporate finance involves planning and managing a firm's long-term investments
  • Three main pillars of corporate finance are investment, financing, and liquidity
  • Investment capital budgeting involves planning and managing long-term investments
  • Capital structure deals with the methods a firm uses to raise and manage long-term financing
  • Working capital management involves managing short-term assets and liabilities

Investment Decisions

  • Starting a firm requires investment in assets like inventory, machinery, land, and labor
  • Cash invested in assets must match the amount of cash raised through financing
  • The goal in starting a firm is value creation through efficient investment, management, profitability and liquidity

Value Creation

  • Corporate finance aims to create value
  • Value is created by efficient investment decisions, financing policies, and liquidity management
  • The balance sheet equation (Assets = Equity + Liabilities) shows the balance sheet's structure

Who Makes the Decisions?

  • Financial managers are responsible for answering key questions about investments, financing, and daily operations
  • Top financial officers like finance directors (FD) or chief financial officers (CFO) handle these responsibilities

Finance Management Decisions

  • Capital budgeting involves identifying investment opportunities that are worth more than their cost to the firm
  • Cash flows from assets must exceed costs to create value
  • Financial managers must consider the amount and timing of expected cash flows, as well as the risk associated with those cash flows
  • Evaluating the size, timing, and risk or future cash flows is the most critical component of capital budgeting

Capital Structure

  • Capital structure refers to the mix of long-term debt and equity used by a firm to finance its operations
  • Financial managers consider how much to borrow (debt-equity mix) which impacts the business' risk and value. Less expensive financing options are ideal.

Working Capital Management

  • Working capital management involves managing short-term assets (inventory) and liabilities (supplier payments)
  • Effective working capital management ensures the firm has sufficient resources to operate daily without interruptions
  • Short-term assets & liabilities operations involve several activities that require managing cash receipts/disbursements

Financial Markets

  • Cash is the center of all financial decisions
  • Financial markets are crucial for raising cash for investments
  • Cash flows from the firm go to investors and creditors in the financial markets
  • Firms sell equity and borrow money to raise cash

Financial Markets - Primary and Secondary

  • Primary Markets: The initial sale of securities by governments and corporations. Corporations raise money from the sale of securities to the public.
  • Secondary Markets: Investors trade securities after the initial sale. This provides liquidity (ability to resell) and helps determine the fair value for shares

Secondary Markets - Dealers vs. Auction

  • Dealer Markets (OTC): Dealers buy and sell securities for themselves. More common in debt securities (over-the-counter trading).
  • Auction Markets: These markets match buyers and sellers (e.g., stock exchanges)

Economic Environment

  • Government economic policies (monetary and fiscal policy) affect the firm
  • Monetary policy involves using interest rates and money supply to manage the economy
  • Fiscal policy involves using government spending and taxation to manage the economy
  • Exchange rate policy involves managing exchange rates to improve international trade competitiveness
  • Macroeconomic policy levers involve government decisions impacting the firm's economic environment.

The Triple Bottom Line

  • Businesses should consider people, the planet, and profit
  • The goal of financial management is to maximize the current value per share of existing equity

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Introduction to Corporate Finance PDF

Description

This quiz covers essential concepts of corporate finance, including investment decisions, financing methods, and liquidity management. You'll explore how to create value through effective capital budgeting and capital structure. Test your knowledge on the foundational principles guiding corporate finance.

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