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CORPORATE FINANCE EXAM 1 QUESTIONS AND ANSWERS -2
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CORPORATE FINANCE EXAM 1 QUESTIONS AND ANSWERS -2
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CORPORATE FINANCE EXAM 1 QUESTIONS AND ANSWERS #2What is corporate finance? - correct answer What assets a company should buy
What projects to invest in
How to raise cash to finance these investments
in order to MAINTAIN AND MAXIMIZE ECONOMIC VALUE
Ultimately, the firm must be a __ - correct answer cash generating activity
The cash flows from the firm must __ the cash flows from the financial markets - correct
answer exceed
2 main questions - correct answer 1. Capital budgeting
2. Capital structure
Capital budgeting decision - correct answer What long-term investments should the firm
choose?
Fixed Assets
Capital structure decision - correct answer How should the firm raise funds for the
selected investments
Liabilities and SH Equity
Ultimate goal of financial managers - correct answer Shareholder wealth maximization
= maximizing firm value
= maximizing stock price
SH wealth - correct answer stock price (fluctuates, want to maximize) * shares
outstanding (relatively stable)
Financial analyst reports are ___ looking - correct answer forward
Annual and quarterly reports are __ looking - correct answer backward
Media is ___ information - correct answer current
Financial analyst reports, annual and quarterly reports, and media are all ___
information - correct answer public
Insider trading - correct answer any time a person trades while aware of material
nonpublic information
Illegal
Mr. Rajaratnam sentenced to 11 years - tips from company executives and technology
consultants
, Tips from Goldman Sachs director, classmate - got advanced warning of Warren Buffet
investment
types of financial statements - correct answer balance sheet
income statement
accounting cash flow statement
finance cash flow statement
other
balance sheet - correct answer firm's accounting value at a specific point in time
assets go from most liquid to least liquid
liabilities go from debt (current to long-term) to SHE
liquidity - correct answer the ease and quickness with which assets can be converted to
cash without a significant loss in value
NWC - correct answer measure of short-term liquidity
current assets - current liabilities
higher liquidity means - correct answer advantages:
lower probability of running into financial difficulties
more flexibility to firms
disadvantages:
lower rates of return
corporations holding onto cash article - correct answer cash holdings increased to 13%
of total assets
$1.8 trillion
cling to cash and add to debt
motivations:
firms couldn't raise money - Citigroup
wanted to seize opportunities to buy cheap - TI
operating and strategic flexibility - Google
advantages of holding onto cash - correct answer 1. recession fears with lower earnings
or losses
2. lack of access to capital or capital is costly
3. flexibility to take advantage of profitable investment projects
4. stay competitive (can invest in R&D)
disadvantages of holding onto cash - correct answer 1, hurts earnings and later survival
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