Podcast
Questions and Answers
What is a key advantage of a sole proprietorship?
What is a key advantage of a sole proprietorship?
Which type of organization is legally distinct from its owners?
Which type of organization is legally distinct from its owners?
What is the primary criticism of the 'shareholder primacy' rule?
What is the primary criticism of the 'shareholder primacy' rule?
Which body has the authority to declare dividends in a corporation?
Which body has the authority to declare dividends in a corporation?
Signup and view all the answers
What can stockholders do in a corporation?
What can stockholders do in a corporation?
Signup and view all the answers
What represents a disadvantage of a sole proprietorship?
What represents a disadvantage of a sole proprietorship?
Signup and view all the answers
What is the mission of the board of directors in a corporation?
What is the mission of the board of directors in a corporation?
Signup and view all the answers
What type of corporation aims to balance shareholder profit with social responsibility?
What type of corporation aims to balance shareholder profit with social responsibility?
Signup and view all the answers
What is a circumstance that can lead to multiple IRRs for a project?
What is a circumstance that can lead to multiple IRRs for a project?
Signup and view all the answers
What does a positive Net Present Value (NPV) indicate about a project?
What does a positive Net Present Value (NPV) indicate about a project?
Signup and view all the answers
Why is IRR not appropriate for projects with long lifespans?
Why is IRR not appropriate for projects with long lifespans?
Signup and view all the answers
Which of the following is considered a sunk cost?
Which of the following is considered a sunk cost?
Signup and view all the answers
What is the formula for calculating the present value (PV) of a perpetuity?
What is the formula for calculating the present value (PV) of a perpetuity?
Signup and view all the answers
What is an opportunity cost in capital investment decisions?
What is an opportunity cost in capital investment decisions?
Signup and view all the answers
To calculate the present value (PV) of an annuity, which factors must be considered?
To calculate the present value (PV) of an annuity, which factors must be considered?
Signup and view all the answers
What is defined as the Internal Rate of Return (IRR)?
What is defined as the Internal Rate of Return (IRR)?
Signup and view all the answers
How should side effects of a proposed project be classified?
How should side effects of a proposed project be classified?
Signup and view all the answers
Which cash flows should be used in the NPV calculation of a project?
Which cash flows should be used in the NPV calculation of a project?
Signup and view all the answers
When should a project be accepted based on the IRR rule?
When should a project be accepted based on the IRR rule?
Signup and view all the answers
What should be done with allocated costs in capital budgeting?
What should be done with allocated costs in capital budgeting?
Signup and view all the answers
In the NPV calculation with cash flows of $200, $400, and $600 at a 5% discount rate, what is the NPV?
In the NPV calculation with cash flows of $200, $400, and $600 at a 5% discount rate, what is the NPV?
Signup and view all the answers
What happens to the present value of a perpetuity if the coupon payment is increased?
What happens to the present value of a perpetuity if the coupon payment is increased?
Signup and view all the answers
What problem arises when comparing two mutually exclusive projects using IRR?
What problem arises when comparing two mutually exclusive projects using IRR?
Signup and view all the answers
Which of the following statements about annuities is incorrect?
Which of the following statements about annuities is incorrect?
Signup and view all the answers
What does the Price Earnings Ratio (PER) depend on?
What does the Price Earnings Ratio (PER) depend on?
Signup and view all the answers
How is the book value of a firm calculated?
How is the book value of a firm calculated?
Signup and view all the answers
What does a high Price to Book Value Ratio (PBR) indicate?
What does a high Price to Book Value Ratio (PBR) indicate?
Signup and view all the answers
In the provided example, what is the payout ratio?
In the provided example, what is the payout ratio?
Signup and view all the answers
What factors contribute to the theoretical growth rate of 10% in the example?
What factors contribute to the theoretical growth rate of 10% in the example?
Signup and view all the answers
If a firm has no growth, what would be its theoretical price per share?
If a firm has no growth, what would be its theoretical price per share?
Signup and view all the answers
What is the relationship between market value and book value in firms?
What is the relationship between market value and book value in firms?
Signup and view all the answers
What does the future value formula calculate?
What does the future value formula calculate?
Signup and view all the answers
Which of these best describes a firm's value (V) formula?
Which of these best describes a firm's value (V) formula?
Signup and view all the answers
In the context of present value, what does discounting refer to?
In the context of present value, what does discounting refer to?
Signup and view all the answers
How is the net present value (NPV) defined?
How is the net present value (NPV) defined?
Signup and view all the answers
If an investment is compounded semiannually, how do you adjust the interest rate and time in the formula?
If an investment is compounded semiannually, how do you adjust the interest rate and time in the formula?
Signup and view all the answers
What does the Effective Annual Rate (EAR) account for that the Annual Percentage Rate (APR) does not?
What does the Effective Annual Rate (EAR) account for that the Annual Percentage Rate (APR) does not?
Signup and view all the answers
Using the future value formula, what will the future value of an investment of $1000 at a rate of 9% over 8 years be?
Using the future value formula, what will the future value of an investment of $1000 at a rate of 9% over 8 years be?
Signup and view all the answers
What is the primary purpose of the present value formula?
What is the primary purpose of the present value formula?
Signup and view all the answers
What condition is required for Net Present Value (NPV) to equal zero in an efficient market?
What condition is required for Net Present Value (NPV) to equal zero in an efficient market?
Signup and view all the answers
What does ex-ante expected return depend on?
What does ex-ante expected return depend on?
Signup and view all the answers
Which of the following statements about standard deviation is true?
Which of the following statements about standard deviation is true?
Signup and view all the answers
What is a key benefit of diversifying investments in portfolios?
What is a key benefit of diversifying investments in portfolios?
Signup and view all the answers
What does the Capital Asset Pricing Model (CAPM) relate to the risk premium?
What does the Capital Asset Pricing Model (CAPM) relate to the risk premium?
Signup and view all the answers
How is the market risk premium typically estimated?
How is the market risk premium typically estimated?
Signup and view all the answers
What does a stock positioned above the Security Market Line (SML) indicate?
What does a stock positioned above the Security Market Line (SML) indicate?
Signup and view all the answers
What is the weighted average cost of capital (WACC) primarily derived from?
What is the weighted average cost of capital (WACC) primarily derived from?
Signup and view all the answers
What fundamental concept in finance allows investors to reduce the risk associated with single asset investments?
What fundamental concept in finance allows investors to reduce the risk associated with single asset investments?
Signup and view all the answers
Study Notes
Corporate Finance Finals 2023 - Summary
- Session 1 (Chapters 1, 2, & 3): Financial management and control of a firm
- Session 2 (Chapter 4): Time value of money
- Session 3 (Chapter 6): Internal rate of return and other investment rules
- Session 4 (Chapter 7): Capital investment decisions
- Session 5 (Chapter 5): Stock valuation
- Session 6 (Chapters 5 & 16): Bond valuation
- Session 7 (Chapter 9): Risk and return – statistics
- Session 8 (Chapter 10): Capital asset pricing model (CAPM) and cost of equity
- Session 9 (Chapter 12): Weighted average cost of capital (WACC)
Organizational Structures
- Sole Proprietorship: Owned by one person, with no distinction between business and personal income. Advantages are ease of startup and low cost, disadvantages include unlimited liability and limited transferability.
- Partnership: Similar to sole proprietorship, co-owned by multiple individuals, potentially with special agreements.
- Corporation: A legal entity distinct from owners (shareholders). Shareholders elect a board of directors to make decisions (e.g., dividend declarations, large investments).
CFO (Chief Financial Officer) Role
- Cash flow management: Deals with cash flows in and out of the firm.
- Investment decisions: The CFO is responsible for making investment decisions regarding real assets of the firm
- Financial reporting to stakeholders: Includes detailed reporting to the shareholders.
- Controller role: Includes preparation of financial statements
- Treasurer role: Manages capital budgeting, financing, and cash management. Recommends dividend policy, manages insurance and oversees pension plans.
Financial Statements
- Balance Sheet: Snapshot of a firm's assets and liabilities at a specific point in time
- Assets: Resources owned by the firm (current, fixed and other assets)
- Liabilities: Obligations owed by the firm (equity- preferred and common stock, retained earnings, long-term debt and short-term debt)
- Income Statement: Summary of a firm's financial performance over a period of time (operating activities, financing activities)
- Revenue: Income generated from operations (recorded when earned, not when paid)
- Expenses: Costs incurred producing revenue (recorded when incurred)
Depreciation
- Depreciation is the process whereby a company records the loss in value of a fixed asset over time.
- It is a cost, and impacts the net value of assets.
Cash Flow Statement
- Cash flow from operations: Cash flow generated via the firm's normal business operations.
- Cash flow from investing: Cash flow from buying or selling long-term assets (includes purchasing or selling buildings, machines, property)
- Cash flow from financing: Cash flow from borrowing and repaying debt; issuance or repurchase of securities; dividends paid to investors.
- Methods for preparing the cash flow statement (direct and indirect)
Future Value and Present Value
- Future value (FV): Measures how much an investment grows in the future.
- Present value (PV): Used to calculate how much is needed today to achieve a specific future value.
Net Present Value (NPV) and Internal Rate of Return (IRR)
- NPV: Calculation of a project's discounted cash flows.
- IRR: Discount rate that sets NPV to zero, indicating the return on an investment.
Capital Investment Decisions
- Incremental cash flows: Cash flows that result directly from a project.
- Sunk costs: Irrecoverable past costs, ignored in a decision-making context
- Opportunity costs:Potential return from the best forgone alternative use of an asset.
- Side effects: Effects of a project on other aspects of a firm.
Stock Valuation
- Methods to determine stock valuation: Net Asset Value (NAV), Liquidation Value, Market Value.
- Absolute valuation: Discounting cash flows, including constant and growing dividends.
- Relative valuation: Comparing stock prices to financial metrics of other companies (e.g., price-to-earnings ratio, price-to-book ratio).
Bond Valuation
- Bond valuation: The process of determining the value of a bond based on the sum of the present value of future interest payments and the par value.
Risk and Return – Statistics
- Expected return: Average of possible returns based on their probability of occurrence.
- Variance/Standard deviation: Measures the risk of a security (or portfolio) by showing dispersion around the average return.
Capital Asset Pricing Model (CAPM)
- Relates the required rate of return of a security to its risk;
- Market risk premium
- Beta: measures a security's relative volatility compared to the market
Weighted Average Cost of Capital (WACC)
- The weighted average of the cost of equity and the after-tax cost of debt for a firm.
- Used in capital budgeting to evaluate investment projects.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers key concepts from the 2023 Corporate Finance curriculum, including financial management, time value of money, investment rules, and risk analysis. Participants will explore topics from various chapters, focusing on capital asset pricing, stock and bond valuations, and the weighted average cost of capital. Test your understanding and preparation for the finals!
