Corporate Finance Questions and Correct Answers & Latest Updated
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Course
Corporate Finance
Institution
Corporate Finance
Capital Budgeting Process (+1 year): Steps
o :## Step 1. Generate Ideas (most important step)
o Step 2. Analyze individual proposals (CF forecast)
o Step 3. Plan the capital budget (plan capital budget, strategic within company)
o Step 4. Monitor and post-audit (follow up)
Capital Budgeting ...
Corporate Finance Questions and Correct
Answers & Latest Updated
Capital Budgeting Process (+1 year): Steps
o :## Step 1. Generate Ideas (most important step)
o Step 2. Analyze individual proposals (CF forecast)
o Step 3. Plan the capital budget (plan capital budget, strategic within company)
o Step 4. Monitor and post-audit (follow up)
Capital Budgeting Process & Projects
o :## Process of identifying and evaluating capital projects, projects where cash flow to the
firm will be received over a period longer than a year
Capital Budgeting Process: Projects
o :## can be complex, cost/benefit analysis, several main categories:
1. new products or services: complex decision making, uncertainty involved
2. replacement costs: maintain business, don't need as detailed of an analysis (should
operation continue)
3. Regulatory, safety and environmental: mandatory, generate little to no revenue
Master01: DO NOT COPY AND PASTE!! August 25, 2024 Latest Update
,2|Page: 2024/2025 Grade A+
o :## 1. decisions based on cash flows (projected, do not use net income/accounting, actual CF,
costs considered)
2. timing of cashflows is crucial (discount over time)
3. cash flows based on opportunity costs (cash flows with investment compared to without
investment)
4. cash flows after tax: firm value based on cash flows they get to keep
5. financing costs are ignored (cost of interest is accounted for in discount rate), only
projects that are expected to return more than cost of capital needed to fund them will
increase the value of the firm
Sunk Costs
o :## cost that has already been incurred, decisions based on current and future cash flows
Opportunity Costs
o :## what a resource is worth in its next best use, ex opportunity cost of idle machinery would
be the lost sale proceeds if intent was to sell
Incremental Cash Flows
o :## cash flows arising with a decision minus cash flows that would have flowed without that
decision
Externalities
o :## effect of an investment on activities other than investment; "side effects", positive helps
another part of firm
cannibalization: investment takes sales away from existing part of business
Master01: DO NOT COPY AND PASTE!! August 25, 2024 Latest Update
, 3|Page: 2024/2025 Grade A+
Project Sequencing
o :## investing in one project creates the opportunity to invest in another
Conventional CF v Non-Conventional CF
o :## Conventional: CF are outlay followed by a series of inflows
Non-Convetional: initial outlay followed by inflows and outflows
Independent Project v Mutually Exclusive
o :## independent: project cash flows are independent from each other, both can be
undertaken
mutually exclusive: projects directly compete with each other for funding
project sequencing: one project needs to be completed to take on another, however if first
is unprofitable, won't take on the next
Unlimited Funds v Capital Rationing
o :## if company experiences capital rationing, must choose between projects
capital rationing: prioritizing projects when firms don't have unlimited funds available
o :## 1. NPV: present value of future after tax cash flows, decision rule: NPV > 0 then accept
project; positive NPV increases shareholder value/wealth
Master01: DO NOT COPY AND PASTE!! August 25, 2024 Latest Update
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