Corporate Finance Governance Quiz
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Questions and Answers

Match the finance concepts with their definitions:

Capital Budgeting = Process of selecting and accepting investment projects Capital Structure = Choice of financial mix (debt versus equity) Net Working Capital = Management of short-term cash flows Cash Management = Handling timing mismatches of cash inflows and outflows

Match the financial terms with their descriptions:

ROCE = Return on Capital Employed NOPAT = Net Operating Profit After Tax Operating Profit Rate = Profitability measure based on sales after investment Cash Flow = Net amount of cash being received and paid out

Match the financial statements to their characteristics:

Cash Flow Statement = Reflects real payments made Income Statement = Documents all payments (including non-cash items) Depreciation = Non-financial section of income statement Cash Flow Analysis = Central to understanding shareholder value creation

Match the components of capital structure with their types:

<p>Debt = Borrowed funds with a repayment obligation Equity = Ownership financing through stock Bondholders = Creditors who provide debt financing Shareholders = Investors providing equity financing</p> Signup and view all the answers

Match the purpose of cash flow with its significance:

<p>Pay Dividends = Return on investment to shareholders Repay Principals = Timely settlement of debt obligations Increase Operating Assets = Invest in business growth Ensure Remuneration = Compensate investors for risk assumed</p> Signup and view all the answers

Match the terms related to financial management with their focus areas:

<p>Capital Budgeting = Investment project selection Capital Structure = Financial resource allocation Cash Management = Short-term liquidity management Cash Flow Analysis = Assessment of cash availability</p> Signup and view all the answers

Match the financial ratios with their relevance:

<p>ROCE = Comparison between return and cost of capital Operating Profit Rate = Measure profitability from sales NOPAT = Profit measurement after tax Cash Flow = Indicator of financial health and liquidity</p> Signup and view all the answers

Match the aspects of cash flow with their impacts on business:

<p>Cash Inflows = Money received from operations or sales Cash Outflows = Payments made for expenses or investments Net Cash Flow = Difference between inflows and outflows Cash Flow Timing = Impact on liquidity and operations</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Average Return = The mean annual return an investor could expect over a specific period Beta Coefficient = A measure of the risk of a stock in relation to the market WACC = The average cost of capital from both equity and debt financing Risk Premium = The additional return expected for taking on additional risk</p> Signup and view all the answers

Match the following formulas with their descriptions:

<p>CAPM = A model used to determine the cost of equity based on risk WACC Formula = The formula to calculate the average cost of capital Return Formula = The formula for calculating average stock return Risk-adjusted Return = Expected return adjusted for the level of risk taken</p> Signup and view all the answers

Match the following components of WACC with their values:

<p>Equity Financing = 100/400 Debt Financing = 300/400 Cost of Equity = 10.5% After-tax Cost of Debt = 2.6%</p> Signup and view all the answers

Match the following investment concepts with their implications:

<p>Time Value of Money = A principle stating that cash flows today are worth more than future cash flows Risk and Return = Higher risk investments require a higher expected return Cost of Equity = The return required by shareholders for their investment Investment Decision = The process of comparing current cash flows with future cash flows</p> Signup and view all the answers

Match the following stock return periods with their average return values:

<p>1926-2002 = 12.2% Present Day = Variable based on market conditions Short-term = Often lower than long-term average returns Long-term = Typically higher average returns than short-term</p> Signup and view all the answers

Match the following investor types with their characteristics:

<p>Risk-averse Investor = Prefers lower risk investments with stable returns Risk-seeking Investor = Willing to take on high risk for potentially high returns Conservative Investor = Focuses on preservation of capital Aggressive Investor = Targets high growth by investing in volatile stocks</p> Signup and view all the answers

Match the following elements of the Capital Asset Pricing Model (CAPM) with their meanings:

<p>Rf = Risk-free rate of return Rm = Expected market return Beta = Sensitivity of an asset to movements in the overall market Risk Premium = Expected return above the risk-free rate</p> Signup and view all the answers

Match the following types of financial returns with their characteristics:

<p>Nominal Return = Return before adjusting for inflation Real Return = Return adjusted for inflation Expected Return = The return anticipated based on historical performance Annualized Return = Return expressed as if it were earned over a year</p> Signup and view all the answers

Match the following cash-flows with their correct classification according to NPV methodology:

<p>Incremental cash-flows = Only use these when calculating NPV Opportunity costs = Consider these as costs if they result from asset sale Sunk costs = Ignore these in NPV calculations Allocated costs = Exclude unless they are incremental to the project</p> Signup and view all the answers

Match the cash flow amounts with their present value calculations for the year 2020:

<p>800 = $727 850 = $702 950 = $713 1075 = $734</p> Signup and view all the answers

Match the investment outcomes with their corresponding NPV decisions:

<p>Both projects A and B negative NPV = Reject both projects At least one project has positive NPV = Accept the one with highest NPV NPV of -$2609.4 = Should not invest in the project NPV of $138 = Accept the project</p> Signup and view all the answers

Match the cash flows with the years they occur for the project with an investment of $10,000:

<p>Year 1 = $500 Year 2 = $1500 Year 3 = $10,000 Year 0 = -$10,000</p> Signup and view all the answers

Match the cash flow sum with the corresponding total amounts:

<p>Sum of cash flow = $12,000 Sum of present value = $7,390.5 Initial investment = $10,000 NPV = -$2,609.4</p> Signup and view all the answers

Match the terms with their explanations in financial analysis:

<p>NPV = The difference between present value of cash inflows and outflows Opportunity costs = Costs associated with lost revenue from asset sale Sunk costs = Costs already incurred and irreversible Incremental cash-flows = Cash-flows directly resulting from accepting a project</p> Signup and view all the answers

Match the present value of cash flows to their corresponding years:

<p>Year 2018 = $727 Year 2019 = $702 Year 2020 = $713 Year 2021 = $734</p> Signup and view all the answers

Match the components of NPV with their descriptions:

<p>PV of cash flows = The sum of all discounted future cash inflows Initial investment = The amount of capital invested at the start Positive NPV = Indicates a profitable project Negative NPV = Indicates an unprofitable project</p> Signup and view all the answers

Match the following financial terms with their definitions:

<p>Net Present Value (NPV) = The difference between the present value of cash inflows and outflows Internal Rate of Return (IRR) = The discount rate that makes the NPV of a project zero Present Value (PV) = The current worth of a future sum of money Cash Flow = The total amount of money being transferred into and out of a business</p> Signup and view all the answers

Match the following scenarios with their respective NPV results:

<p>Project A = NPV = 135.5, should invest Comfy Hotel Upgrade = NPV = 30,381, should invest Gold Mine Investment = NPV = 26.9, should invest Non-investment Scenario = NPV &lt; 0, do not invest</p> Signup and view all the answers

Match the following formulas with their respective financial concepts:

<p>FV = PV*(1+r)^n = Future Value PV = FV*(1+r)^-n = Present Value NPV = Sum of Cash Flows = Net Present Value PV = Cash Flow / r*(1-1/(1+r)^n) = Present Value of Annuity</p> Signup and view all the answers

Match the cash flow amount with its corresponding present value calculation:

<p>500 = PV = 500 / 1.02 1,500 = PV = 1,500 / (1.02)^2 10,000 = PV = 10,000 / (1.02)^10 27,500 = PV = 27,500 / 0.12</p> Signup and view all the answers

Match the investment duration with the project it relates to:

<p>Gold Mine = 5 years Comfy Hotel Upgrade = 10 years Initial Cash Flow Analysis = 10 years Quick Investment Project = 1 year</p> Signup and view all the answers

Match the following financial calculations with their outcomes:

<p>FV=2000<em>1,04^10 = 2960,49 € PV=2000</em>1,08^-10 = 926,37 € PV=5000000*(1,02)^-27 = 2,929,310,22 € PV=10,000,000*1,1^-5 = 12,418,426,46 €</p> Signup and view all the answers

Match the following investment rules with their descriptions:

<p>NPV &gt; 0 = Accept the project NPV &lt; 0 = Reject the project PV of revenues &gt; PV of costs = Investment is favorable PV of revenues &lt; PV of costs = Investment is unfavorable</p> Signup and view all the answers

Match each project with its respective discount rate:

<p>Comfy Hotel = 12% Gold Mine = 10% Initial Cash Flow = 2% General Projects = Assumed rate of 10%</p> Signup and view all the answers

Match the following returns with their percentages:

<p>R=80,000/10,000^(1/12)-1 = 18,9 % R=(45560/25500)^(1/10)-1 = 5,97 % R=1,04^10-1 = 40,74 % R=1,1^7-1 = 15,87 %</p> Signup and view all the answers

Match the cash inflow with the corresponding operation cost:

<p>Gold Mine Revenue = $30 million Gold Mine Operations = $10 million Comfy Upgrade Profit = €15,000 Comfy Depreciation = €12,500</p> Signup and view all the answers

Match each project with its initial investment amount:

<p>Gold Mine = $50 million Comfy Hotel Upgrade = €125,000 Project A = $100 General Financial Project = $10,000</p> Signup and view all the answers

Match the cash flow terms with their definitions:

<p>Cash Flow = Inflow and outflow of cash from a project Net Present Value (NPV) = Difference between present value of cash inflows and outflows Discount Rate = Rate of return used to discount future cash flows Internal Rate of Return (IRR) = Rate at which NPV of cash flows equals zero</p> Signup and view all the answers

Match the following financial calculations with their specific outputs:

<p>Total Cash Flow for Comfy Hotel = 275,000 PV of Comfy Hotel Upgrade = 155,381.13 Total PV Calculation = 10,135.5 NPV of Gold Mine = 26.9</p> Signup and view all the answers

Match the following investment scenarios with decisions to be made:

<p>Investing in a project with NPV &gt; 0 = Should invest Accepting cash now instead of later = Prefer immediate cash Paying 5 million in future vs. present investment = Calculate present value needed Evaluating machine benefits vs costs = Analyze cash flows for feasibility</p> Signup and view all the answers

Match the following variables in the Time Value of Money formulas:

<p>PV = Present Value FV = Future Value r = Interest Rate n = Number of periods</p> Signup and view all the answers

Match the financial metrics with their definitions:

<p>IRR = Internal Rate of Return NPV = Net Present Value D/E = Debt-to-Equity Ratio D / (D+E) = Debt Ratio</p> Signup and view all the answers

Match the decision rules to the respective financial evaluation method:

<p>Payback Period = Accept all projects with a PP before the cut-off date Profitability Index = Accept independent projects if PI &gt; 1 NPV = Always prefer over IRR for mutually exclusive projects IRR = Must be superior to WACC for investment</p> Signup and view all the answers

Match the financial concepts with their preferred usage context:

<p>Market Values = Reflects true current value of debt and equity Book Values = Preferred by investors and credit rating firms Capital Rationing = Prefer PI-rules for non-mutually exclusive projects Contractual Obligations = Debt repayments pressures the firm</p> Signup and view all the answers

Match the problem types to their descriptions:

<p>Mutually Exclusive Projects = May lead to different decisions between IRR and NPV Negative Cash Flows = Cannot use IRR Cut-off date = Specific deadline in Payback Period method Tax Benefits = Debt provides potential tax reductions</p> Signup and view all the answers

Match the financial concepts to their formulas or ratios:

<p>Profitability Index = NPV / Initial Investment NPV greater than 0 = Invest if IRR is superior to WACC Debt Ratio = D / (D+E) Payback Period = Time taken to recover investment</p> Signup and view all the answers

Match the financial principles to their evaluation criteria:

<p>IRR superior to WACC = Investment decision is to invest NPV negative = Do not invest Quickest Payback Period = Choice for mutually exclusive projects Sensitivity to Volatility = Concern for Market Values</p> Signup and view all the answers

Match the financial evaluation methods to their advantages:

<p>IRR = Focus on rate of return NPV = Shows value added to firm PI = Ranks projects based on value yielded per unit invested Payback Period = Simplicity and quick recovery indication</p> Signup and view all the answers

Match each term with its appropriate description:

<p>Debt = Provides tax benefits Equity = Represents ownership in a company Cut-off date = Defines time limit for Payback Period analysis WACC = Weighted Average Cost of Capital</p> Signup and view all the answers

What term is used to describe the process of selecting and accepting an investment project?

<p>Capital Budgeting (D)</p> Signup and view all the answers

What is meant by capital structure in financial management?

<p>The choice of financial mix of debt versus equity (A)</p> Signup and view all the answers

How is return on capital employed (ROCE) primarily used in finance?

<p>To assess value creation for shareholders (B)</p> Signup and view all the answers

What is a key difference between cash flow and income statements?

<p>Cash flow reflects actual cash movements, while income statements may include non-cash items. (B)</p> Signup and view all the answers

What purpose does cash flow analysis serve in relation to shareholders?

<p>To ensure adequate remuneration for investment risk (C)</p> Signup and view all the answers

What does NOPAT stand for in financial calculations?

<p>Net Operating Profit After Tax (B)</p> Signup and view all the answers

Which of the following is primarily focused on managing short-term cash flows?

<p>Cash Management (A)</p> Signup and view all the answers

Why is cash flow considered central to finance?

<p>It allows for the payment of dividends and management of operating assets. (A)</p> Signup and view all the answers

Which cash flow should be included when calculating the NPV of a project?

<p>Incremental cash flows (A)</p> Signup and view all the answers

What should be considered as a cost when deciding to use an asset in a new project?

<p>Opportunity costs (B)</p> Signup and view all the answers

When comparing two mutually exclusive projects using NPV, what decision should be made if both projects have a negative NPV?

<p>Reject both projects (C)</p> Signup and view all the answers

In the NPV calculation, which of the following should be excluded?

<p>Sunk costs (B)</p> Signup and view all the answers

How is the NPV determined when calculating cash flows over multiple years?

<p>By discounting future cash flows and subtracting initial investment (B)</p> Signup and view all the answers

Which investment opportunity should be avoided based on the NPV rule?

<p>A project with a negative NPV (A)</p> Signup and view all the answers

What is the first step to take when evaluating two potential projects?

<p>Calculate the NPV for both projects (C)</p> Signup and view all the answers

If the sum of discounted cash flows is $7,390.5 and the initial investment is $10,000, what is the NPV?

<p>$-2,609.4 (C)</p> Signup and view all the answers

What is the effective interest rate for Investment B if the stated interest rate is 9.85% compounded monthly?

<p>10.31% (D)</p> Signup and view all the answers

Which of the following formulas correctly calculates the present value of a growing perpetuity?

<p>PV = C / (r - g) (C)</p> Signup and view all the answers

What is the Future Value of an investment of €10,000 at an interest rate of 12% after one year?

<p>€11,200 (C)</p> Signup and view all the answers

How is the effective annual interest rate defined?

<p>An equivalent effective annual rate for an investment compounded once a year. (C)</p> Signup and view all the answers

For the perpetual bond paying €50 annually with a market interest rate of 10%, what would be its present value?

<p>€500 (A)</p> Signup and view all the answers

What formula is used to calculate Future Value over multiple periods?

<p>FV = PV * (1 + R) ^ n (D)</p> Signup and view all the answers

What is the purpose of the present value of annuity formula in investment calculations?

<p>To estimate an investment's current worth based on future cash flows (C)</p> Signup and view all the answers

If you invest €1,000 at a semi-annual interest rate of 10%, what will be your wealth at the end of the first year?

<p>€1,102.50 (D)</p> Signup and view all the answers

How do you calculate the future value of an annuity when investing €1,000 per year at an interest rate of 5% for 3 years?

<p>€3,157.63 (A)</p> Signup and view all the answers

What is the Present Value if the cash inflow is €11,424 to be received in one year with a discount rate of 12%?

<p>€10,000 (B)</p> Signup and view all the answers

In which situation would you apply the formula for perpetuity?

<p>When evaluating a long-term investment that pays constant cash indefinitely (C)</p> Signup and view all the answers

What is the result of investing $1,000 at an annual interest rate of 10.71% compounded annually for 76 years?

<p>$2,281,395 (A)</p> Signup and view all the answers

When considering cash inflows, what does the term 'cash outflows' refer to?

<p>The costs incurred in making an investment. (B)</p> Signup and view all the answers

If €50 is paid annually forever and the market interest rate is 5%, what is the present value of this cash flow?

<p>€1,000 (A)</p> Signup and view all the answers

What can be concluded when comparing multiple investment products with different compounding periods?

<p>Effective interest rates allow for a fair comparison of returns. (B)</p> Signup and view all the answers

What is the main purpose of an indenture or prospectus in a loan agreement?

<p>To set terms such as maturity date and repayment schedule (C)</p> Signup and view all the answers

Which of the following is NOT typically included in loan amortization calculations?

<p>Borrower's personal background (B)</p> Signup and view all the answers

What type of loan payment structure involves a change in interest amount with each payment?

<p>Equal principal payments (A)</p> Signup and view all the answers

What does ESG stand for in the context of company performance measurement?

<p>Environmental, Social, and Governance (A)</p> Signup and view all the answers

What role does self-reporting play in ESG performance measures?

<p>It allows management to selectively highlight strengths (C)</p> Signup and view all the answers

Which of the following is an example of a restriction that may be included in covenants?

<p>Maximum level of Working Capital Requirement (D)</p> Signup and view all the answers

In calculating the ending balance of an amortized loan, what component is subtracted from the beginning balance?

<p>Principal amount paid (B)</p> Signup and view all the answers

What consequence can arise during a shareholders meeting when questions are raised regarding a company's ESG performance?

<p>Disputes over management's self-reported data (A)</p> Signup and view all the answers

What should be preferred when dealing with mutually exclusive projects if IRR and NPV suggest different decisions?

<p>Always choose NPV (C)</p> Signup and view all the answers

Which statement is true regarding the Profitability Index (PI) when evaluating mutually exclusive projects?

<p>Use NPV-rules for mutually exclusive projects (D)</p> Signup and view all the answers

Under which condition should an independent project based on Profitability Index (PI) be accepted?

<p>If PI is greater than 1 (B)</p> Signup and view all the answers

What is a key disadvantage of using IRR when dealing with projects that involve negative cash flows?

<p>It does not provide a unique solution (A)</p> Signup and view all the answers

Which of the following is a primary rule for the Payback Period (PP) method regarding project selection?

<p>Select projects with a PP before a defined cut-off date (B)</p> Signup and view all the answers

What is a major issue with using book value versus market value when assessing capital structure?

<p>Book value is preferred for contractual obligations (B)</p> Signup and view all the answers

When utilizing the trade-off model, what advantage does debt offer to a firm?

<p>Debt affords tax benefits to the firm (B)</p> Signup and view all the answers

What is the primary function of the Debt-to-Equity Ratio in capital structure analysis?

<p>To indicate the proportion of debt versus equity financing (D)</p> Signup and view all the answers

Flashcards

Average Stock Return

The average return an investor could have expected over a specific period of time, calculated by averaging returns over that timeframe.

Shareholders' Required Return (Cost of Equity)

The rate of return that investors require to invest in a company's stock, reflecting the risk associated with the investment.

Capital Asset Pricing Model (CAPM)

A model used to estimate a company's cost of equity by considering the risk-free rate of return and the risk premium, which is directly related to the market risk of the investment.

Beta Coefficient

A measure of a company's systematic risk, indicating how volatile the stock's price is relative to the overall market.

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Weighted Average Cost of Capital (WACC)

The average of the required return for all sources of financing, including equity and debt, weighted by the proportion of each source in the company's capital structure.

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Cost of Debt

The cost of capital for debt financing, representing the interest rate that a company pays on its borrowing.

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Time Value of Money

The principle that €1 today is worth more than €1 in the future because of the potential to earn interest or returns over time.

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Discounting Cash Flows

The process of comparing the value of cash flows received at different points in time, considering the time value of money.

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Capital Budgeting

The process of selecting and accepting investment projects. It analyzes the profitability and feasibility of potential investments, aligning with the firm's strategic goals.

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Capital Structure

The way a company finances its operations using a mix of debt and equity. It determines how much debt vs. equity will be used to fund investments and operations.

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Net Working Capital

Refers to the difference between a company's current assets and current liabilities. It focuses on managing working capital efficiently, ensuring enough liquidity for day-to-day operations.

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Return on Capital Employed (ROCE)

The profit a company generates from its operations, reflecting its ability to create value from its assets and resources. It is crucial for determining shareholder value and profitability.

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NOPAT

Net Operating Profit After Tax (NOPAT) is the true earnings of a company after accounting for taxes. It is the profit generated by core operations before any interest expense.

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Cash Flow

The ability to generate cash flow from operations. It ensures that the company has enough cash to pay its obligations, invest in growth, and reward shareholders.

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Cash Flow Statement

A financial statement that tracks all cash inflows and outflows of a company. It depicts the movement of cash over a period, highlighting cash generated and used in different operations.

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Income Statement

A statement that summarizes all revenues and expenses of a company for a specific period, revealing its profitability and financial performance. It focuses on accounting profits, not necessarily actual cash flows.

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Net Present Value (NPV)

A method used in capital budgeting that calculates the present value of future cash flows from a project, taking into account the time value of money.

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Present Value (PV)

The value of a future payment or receipt discounted back to its present value, considering the time value of money.

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Future Value (FV)

The value of an amount of money at a future time, considering the time value of money.

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Internal Rate of Return (IRR)

The rate of return that makes the net present value of a project equal to zero.

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Payback Period

A way to analyze investments by looking only at the initial cash outflow and inflow. It calculates the time it takes to recover your original investment.

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Profitability Index (PI)

A measure of the profitability of an investment project. It is calculated by dividing the net present value (NPV) by the initial investment.

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Discounted Cash Flow (DCF) Analysis

It is a capital budgeting method that considers the time value of money. It compares the present value of future cash flows with the initial investment.

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Initial Investment

The initial investment in a project.

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Discount Rate

The rate used to discount future cash flows to their present value. It represents the required rate of return on an investment.

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NPV (Net Present Value)

The difference between the present value of all future cash flows and the initial investment.

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Capital Budgeting Analysis

The analysis of a project's profitability by comparing the present value of future cash flows to the initial investment.

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Present Value of Cash Flows

The total value of all future cash flows generated by a project, discounted to their present value.

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Mutually Exclusive Projects

Mutually exclusive projects are investment options where only one can be chosen, you can't invest in both. For example, you can choose to build a factory in City A or City B, but not both. The IRR and NPV methods may give conflicting recommendations in this case.

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Debt-to-Equity Ratio

The Debt-to-Equity Ratio is a financial leverage ratio that measures the amount of debt a company uses compared to its equity financing. It shows how much debt is used for every €1 of equity.

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Debt Ratio

The Debt Ratio is a financial leverage ratio that measures the proportion of a company's assets financed by debt. It indicates how much of the company's assets are funded by creditors.

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Incremental Cash Flows

Cash flows that occur as a direct result of accepting a new project. They are the only cash flows that should be included in NPV calculations.

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Opportunity Costs

The lost opportunity cost of using an asset for a new project instead of selling it. These costs should be included in NPV calculations.

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Sunk Costs

Costs that have already been incurred in the past and cannot be recovered. Sunk costs should be ignored when making NPV decisions.

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Allocated Costs

Costs allocated by accountants to a project, even though they benefit multiple projects. Allocated costs should be excluded from NPV calculations unless they are directly related to the project's incremental costs.

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NPV Decision Rule for Mutually Exclusive Projects

When evaluating mutually exclusive projects, accept the project with the highest positive NPV. If all projects have negative NPV, reject all projects.

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Discounting

The process of calculating the present value of future cash flows by discounting them at a specified discount rate.

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Value Creation and ROCE

The core principle in finance, stating that a firm can create value for shareholders only if its returns on invested capital exceed the cost of obtaining that capital.

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NOPAT (Net Operating Profit After Tax)

The profit a company generates from its core operations after accounting for taxes but before deducting interest expenses. It represents the true earnings generated by a company's business activities.

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Cash Management

Focuses on managing short-term cash flows effectively, ensuring enough liquidity to meet day-to-day operational needs. It involves managing the timing of cash inflows and outflows.

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FV = PV * (1 + R)^n

The formula used to calculate the future value (FV) of an investment, considering the present value (PV), interest rate (R), and number of periods (n).

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Effective Interest Rate

The interest rate earned on an investment that compounds more than once a year. It reflects the actual return received after considering the compounding frequency.

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Compounding Interest

The process of earning interest on both the principal and accumulated interest. It's like your money making money.

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Compounding Periods

The number of times interest is calculated and added to the principal within a year. It determines the frequency of compounding.

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Perpetuity

A stream of equal payments that continues forever.

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Growing Perpetuity

A stream of equal payments that grows at a constant rate forever.

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Annuity

A stream of equal payments for a fixed period of time.

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Future Value of Annuity

The future value of a series of equal payments made over a specific period.

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Present Value of Annuity

The present value of a series of equal payments made over a specific period.

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Average Return

The average return an investor can expect from an investment over a specific period.

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Growing Perpetuity Simplification

A simplified way to calculate the present value of an annuity where the interest rate is the same as the growth rate.

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Indenture/Prospectus

A legal document outlining the terms of a loan between the issuer and lenders, including details like maturity date, repayment schedule, interest rates, and restrictions on the issuer's actions.

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Amortized Loan

A method of repaying a long-term loan through a series of regular payments.

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ESG Scores

Financial ratios that measure a company's performance regarding environmental, social, and governance factors.

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Covenants

Restrictions imposed by lenders on borrowers, often included in indentures, to mitigate risks.

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Loan Principal

The total amount of money borrowed in a loan, excluding any interest.

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Interest Rate

The rate at which interest is charged on a loan.

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Maturity Date

The date when the principal amount of a loan becomes due for repayment.

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Loan Payments

A series of regular payments made to repay a loan, composed of both principal and interest.

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Mutually exclusive projects and IRR vs. NPV

The IRR method is preferred when evaluating a single project. However, when comparing mutually exclusive projects (where you can only choose one), the NPV method prevails as it provides a more reliable decision.

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Trade-off Model & Cost of Debt

The trade-off model suggests that companies can benefit from debt financing due to tax benefits. However, excessive debt can lead to higher financial distress costs.

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Market Value vs. Book Value

Market values of debt and equity are often preferred by economists as they reflect the current market price and value. However, they can be volatile due to market fluctuations.

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Book Value vs. Market Value

Book values of debt and equity are preferred by investors and credit rating agencies, as they represent the historical cost of assets and liabilities.

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Study Notes

Corporate Finance Governance

  • A company has three key actors: shareholders, board of directors, and the CEO.
  • Shareholders invest in the company and receive dividends.
  • The board of directors represents shareholders and works with the CEO to make decisions.
  • The CEO is the main decision-maker in the company.

Corporate Finance: Key Missions

  • Ensure the company has enough funds for expansion and obligations.
  • Ensure resources are used to generate returns meeting investor requirements.
  • Components include the time value of money, risk-return relationships, cash flow calculations, cost of capital, investment rules, and long-term financing (e.g., loans, equity offerings).

Balance Sheet Model

  • Assets are on the left side, liabilities & equity on the right.
  • Current Assets: cash, inventory, accounts receivable, and short-term debt.
  • Fixed Assets: investments (financial), tangible assets.
  • Liabilities: short-term debt, accounts payable, and long-term debt.
  • Shareholders' equity: difference between assets & liabilities.

Capital Employed Perspective

  • Analyzing the balance sheet from a perspective of solvency and liquidity.
  • Provides insights into financing of operations and measuring economic performance (Return on Capital Employed - ROCE).
  • Understanding how a company finances its operating assets.
  • Measuring its economic performance.

Working Capital

  • Working capital represents money immobilized within the company.
  • It is linked to the business model of a company, but can be optimized.
  • A negative working capital (WCR) is a resource for extra cash for the company to invest in securities (e.g., short-term securities).
  • Working capital calculation often involves Inventory and Accounts receivable less Accounts payable.

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Corporate Finance PDF

Description

Test your understanding of the key actors and missions in corporate finance. This quiz covers the roles of shareholders, the board of directors, and the CEO, as well as essential financial components for effective governance and decision-making. Assess your knowledge on balance sheet models and financial principles.

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