Corporate Finance Quiz

Framework for Corporate Funding, Capital Structure, and Investment Decisions

• Corporate finance deals with the sources of funding, capital structure of corporations, and actions taken to increase shareholder value.

• Capital budgeting is concerned with selecting projects to receive investment funding and financing investment with equity or debt capital.

• Working capital management involves managing the company's monetary funds to deal with short-term operating balance of current assets and liabilities.

• Investment banking evaluates a company's financial needs and raises appropriate capital to create, develop, grow or acquire businesses.

• Corporate finance overlaps with the financial function of the accounting profession, but focuses on deploying capital resources to increase shareholder value.

• Corporate finance emerged in the Italian city-states and the low countries of Europe from the 15th century.

• The Dutch East India Company was the first publicly listed company to pay regular dividends and to get a fixed capital stock.

• London acted as a center of corporate finance for companies around the world by the early 1800s.

• Shareholder theory dominates corporate world strategy despite intense debate and recent momentum for the stakeholder theory.

• Debt capital sources include bank loans, notes payable, bonds, and callable bonds, while equity capital sources include shares of the company sold to investors.

• Preferred stock is an equity security that may have any combination of features not possessed by common stock.

• Decision Tree Analysis and Real Options Valuation are two common tools used to place an explicit value on options inherent in a project.Corporate Finance Summary

• NPV is calculated by discounting future cash flows to their present value and subtracting the initial investment.

• The internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows from a particular project equal to zero.

• The payback period is the time it takes for a project to recover its initial cost from the cash inflows it generates.

• Sensitivity analysis involves calculating the NPV of a project at different values of a single variable.

• Scenario analysis involves specifying different values of economy-wide and company-specific factors to calculate the NPV of a project.

• Monte Carlo simulation involves running thousands of random simulations to generate a histogram of project NPVs that reflect the project's randomness.

• Dividend policy concerns the financial policies regarding the payment of a cash dividend in the present or paying an increased dividend at a later stage.

• Working capital management involves managing the relationship between a firm's short-term assets and its short-term liabilities to ensure that the firm can operate, service long-term debt, and satisfy upcoming operational expenses.

• Working capital is the amount of funds necessary for an organization to continue its ongoing business operations until the firm is reimbursed through payments for the goods or services it has delivered to its customers.

• Management of working capital involves using policies and techniques to manage the current assets and short-term financing to ensure acceptable cash flows and returns.

• Corporate finance in the United States describes activities, analytical methods, and techniques that deal with many aspects of a company's finances and capital.

• Financial risk management is focused on measuring and managing market risk, credit risk, and operational risk within a corporate context.

• The discipline of financial risk management is related to corporate finance, both in operations and funding, and in large firms, the risk management function overlaps with corporate finance.