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Questions and Answers
What are the three main corporate finance decisions?
What are the three main corporate finance decisions?
- Investment decision, Financing decision, Risk management decision
- Investment decision, Financing decision, Dividend decision (correct)
- Investment decision, Risk management decision, Dividend decision
- Risk management decision, Financing decision, Dividend decision
What should be the goal of corporate finance decisions?
What should be the goal of corporate finance decisions?
- Maximization of firm value (correct)
- Minimization of firm value
- Maximization of revenue
- Maximization of shareholder wealth
What should the expected rate of return reflect?
What should the expected rate of return reflect?
- Magnitude of future cashflows only
- Magnitude and timing of future cashflows only
- Timing of future cashflows only
- Magnitude and timing of future cashflows as well as all side effects (correct)
What does the optimal capital structure maximize?
What does the optimal capital structure maximize?
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What should the hurdle rate reflect?
What should the hurdle rate reflect?
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Study Notes
Corporate Finance Decisions
- The three main corporate finance decisions are:
- Investment decisions (capital budgeting): deciding which projects to invest in
- Financing decisions (capital structure): deciding how to finance the projects
- Dividend decisions (payout policy): deciding how to distribute profits to shareholders
Goal of Corporate Finance Decisions
- The goal of corporate finance decisions should be to maximize shareholder value
Expected Rate of Return
- The expected rate of return should reflect the risk of the investment
Optimal Capital Structure
- The optimal capital structure maximizes the firm's value by balancing the debt and equity mix
Hurdle Rate
- The hurdle rate should reflect the minimum rate of return required to justify an investment
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