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Question 1

What is Corporate finance

Answer 1

the answer to these questions:
1. What long-term investments should the firm take on?

2. Where will we get the long-term financing to pay for the investment?
3. How will we manage the everyday financial activities of the firm?

Question 2

What is capital budgeting?

Answer 2

the process of planning and managing the firm’s long-term investments

Question 3

Capital structure

Answer 3

the specific mixture of short-term debt, long-term debt, and equity the firm uses to finance its operations.
- How should we pay for our assets? where do you get money from? through stock or through bond. Should we use debt or equity?

Question 4

What is working capital management?

Answer 4

the difference between a firm’s short-term assets and its short-term liabilities
- everyday liquidity, cash flow, every day finances

Question 5

treasurer

Answer 5

oversees cash management, capital expenditures and financial planning

Question 6

Controller

Answer 6

oversees taxes, cost accounting, financial accounting and data processing

Question 8

The 3 forms of business

Answer 8

1. sole proprietorship
2. partnership
3. corporation

Question 9

Sole proprietorship advantages and disadvantages

Answer 9

Advantages:

Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income

Disadvantages:

Unlimited liability
Limited to life of owner
Equity capital limited to owner’s personal wealth
Difficult to sell ownership interest

Question 10

Partnership advantages and disadvantages

Answer 10

Advantages:

• Two or more owners
• More human and financial capital available
• Relatively easy to start
  Income taxed once as personal income

Disadvantages:

Unlimited liability
- General partnership
- Limited partnership
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
Possible disagreements between partners

Question 11

Corporation advantages and disadvantages

Answer 11

Advantages:

Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital

Disadvantages:

Separation of ownership and management
Double taxation (income is taxed at the corporate rate and then dividends are taxed at the personal rate)

Question 12

Income trust advantages and disadvantages

Answer 12

Advantages
Not subject to corporate income tax and income is typically taxed in hands of unit holders.
Investors view income trusts as more tax efficient.

Disadvantages:
Income trusts are not corporations and so, do not have the same advantages as one

You pay only personal income taxes and enjoy benefits of corporation. But they changed the law, and now you have to pay double-tax. So it’s not as important.

Question 13

Co-operative advanatges and disadvantages

Answer 13

Advantages:
Equally owned by its members
Helps its members compete more effectively while creating social capital

Disadvantages:
Potentially difficult to reach decisions based on premise of equal ownership by members

Question 14

What are the 3 equivalent goals of financial management?

Answer 14

1. Maximize shareholder wealth
2. Maximize share price
3. maximize firm value

Question 15

What is the agency problem and the agency costs

Answer 15

Stockholders (principals) hire managers (agents) to run the company.

Agency Problem:
Conflicts of interest can exist between the principal and the agent.

Agency Costs:
Direct agency costs: misusage of firm’s assets, monitoring cost
Indirect agency costs: forgone opportunity costs

Question 16

Explain managerial compensation

Answer 16

Incentives: . For example, tying bonuses to profits might encourage management to pursue short-run profits and forego projects that require a large initial outlay. Stock options may work, but there may be an optimal level of insider ownership. Beyond that level, management may be in too much control and may not act in the best interest of all stockholders

ex: if you fail to achieve the goal, you will be fired.

ex: you will get stocks.

Problem: Ex: if I can boost my stock in 2 years, I can get paid a lot, and leave. So this is not good for the long time behaviour of the company.

Question 17

Social responsibility and ethical investing

Answer 17

• investors are demanding that corporations behave responsibly
• how a corporation treats the community in which it operates, their customers, corporate governance, their employees, the environment and human rights.

Question 18

What are some controversial business activities

Answer 18

include alcohol, gaming, genetic engineering, nuclear power, pornography, tobacco and weapons.

Question 19

Why would managers avoid takeover?

Answer 19

Poorly managed firms are more attractive as acquisitions than well-managed firms, bc a greater turnaround potential exits. Avoiding a takeover by another firm gives management another incentive to act in the shareholders’ interest.

Question 20

Explain figure cash flows between the firm and the financial markets (1.4)

Answer 20

1.5 slides

Question 21

money markets refers to

Answer 21

short-term debts and liquid securities

Question 22

capital markets

Answer 22

refers to long-term debts and shares of a firm

Question 23

Primary vs secondary markets

Answer 23

• Primary market refers to the original sale by the issuer
  
  • Secondary market refers to where securities are sold and bought after the original sale

Question 24

The risk-return trade-off

Answer 24

There is a reward for bearing risk

The greater the potential reward, the greater the risk

Question 25

simple interest earn interest on ________

Answer 25

principal only

Question 26

Compound interest earn interest on __________

Answer 26

principal and reinvested interest