Corporate Finance Fundamentals

Question 1

What is the ultimate purpose of corporate finance?

Answer 1

To maximize business value by planning and implementing resources while balancing risk and profitability.

Question 2

Name the three fundamental decision areas in corporate finance.

Answer 2

Capital investments, capital financing, and dividends & return of capital.

Question 3

Which side of the market are investment banks said to operate on in primary issuance?

Answer 3

The ‘sell side’.

Question 4

Who are considered ‘buy side’ participants in capital markets?

Answer 4

Fund managers and other investing institutions.

Question 5

List two examples of secondary‑market participants.

Answer 5

Sales & trading desks and stock exchanges/OTC markets.

Question 6

Define a capital investment.

Answer 6

Any investment where the economic benefit extends beyond one year, such as opening a factory or acquiring a business.

Question 7

State the two principal techniques for valuing capital investments.

Answer 7

Net Present Value (NPV) and Internal Rate of Return (IRR).

Question 8

Write the NPV definition in one sentence.

Answer 8

The present value of all future cash flows (positive and negative) generated by an investment.

Question 9

What discount rate is typically used in NPV calculations?

Answer 9

The project or firm’s cost of capital.

Question 10

Describe IRR in a single phrase.

Answer 10

The compound annual rate of return that sets NPV to zero.

Question 11

Give two common formulas to estimate terminal value in DCF analysis.

Answer 11

Growing perpetuity formula and exit multiple formula.

Question 12

Why is terminal value important in valuation?

Answer 12

It captures the value of free cash flows beyond the explicit forecast period.

Question 13

What are the three main drivers analysts evaluate to unlock value?

Answer 13

Business strategy & revenues, cost structure & asset utilization, and risk/capital structure.

Question 14

Provide the generic enterprise value formula.

Answer 14

EV = Market value of equity + Market value of net debt.

Question 15

How are equity value and enterprise value related?

Answer 15

Equity value = Enterprise value – Net debt + Cash.

Question 16

List three potential benefits of mergers and acquisitions.

Answer 16

Cost savings, revenue enhancements, and increased market share.

Question 17

Name three common drawbacks or risks of M&A.

Answer 17

Overpaying, large integration expenses, and negative stakeholder reaction.

Question 18

Outline the first three steps in the 10‑step acquisition process.

Answer 18

1) Acquisition strategy, 2) Acquisition criteria, 3) Search for targets.

Question 19

What is the difference between strategic and financial buyers?

Answer 19

Strategic buyers are operating businesses seeking synergies; financial buyers (PE) focus on investment returns using leverage.

Question 20

Why do most acquisitions involve competing bidders?

Answer 20

Because sellers solicit multiple offers, forcing buyers to pay a premium or demonstrate unique synergies.

Question 21

Explain ‘hard’ versus ‘soft’ synergies.

Answer 21

Hard synergies are cost savings; soft synergies are revenue enhancements.

Question 22

List the six value buckets in best‑practice acquisition analysis.

Answer 22

Stand‑alone value, hard synergies, soft synergies, transaction costs, net synergies, and value created vs price paid.

Question 23

What is capital financing?

Answer 23

Funding used to finance the purchase of assets or projects through debt, equity, or a mix.

Question 24

Sketch the business life‑cycle stages in order.

Answer 24

Launch, Growth, Shake‑out, Maturity (and possible extension).

Question 25

Define capital structure.

Answer 25

The mix of debt and equity a firm employs to fund operations and assets.

Question 26

What is the optimal capital structure objective?

Answer 26

To minimize the firm’s weighted average cost of capital (WACC).

Question 27

State the generic WACC formula components.

Answer 27

(% debt × cost of debt) + (% equity × cost of equity).

Question 28

Give two reasons companies use debt financing.

Answer 28

Lower cost of capital and avoidance of equity dilution.

Question 29

What balance‑sheet measure signals leverage?

Answer 29

Debt‑to‑equity ratio.

Question 30

Name three cash flow ratios that lenders watch.

Answer 30

Total debt/EBITDA, net debt/EBITDA, and cash‑interest‑coverage.

Question 31

What is senior debt?

Answer 31

Borrowings with first claim on assets and typically lower interest rates.

Question 32

Identify three common senior‑debt instruments.

Answer 32

Revolver, Term Loan A, and Term Loan B/C.

Question 33

Define subordinated debt.

Answer 33

Debt ranking below senior claims, used to fill funding gaps and bearing higher yields.

Question 34

What is mezzanine debt?

Answer 34

Non‑traded subordinated debt often carrying equity warrants and yielding 12‑20 % returns.

Question 35

State a rule‑of‑thumb cap for total debt/EBITDA when including subordinated layers.

Answer 35

Approximately 5‑6 × EBITDA.

Question 36

Which credit rating categories are considered investment grade?

Answer 36

Moody’s Baa3/BBB‑ and above.

Question 37

Explain underwriting in capital markets.

Answer 37

A bank raises capital for an issuer by buying securities and reselling to investors.

Question 38

Differentiate firm commitment and best‑efforts underwriting.

Answer 38

Firm commitment: underwriter buys entire issue; best efforts: sells as much as possible without guarantee.

Question 39

What is the purpose of a roadshow?

Answer 39

Management presents investment merits to potential investors before pricing.

Question 40

Why might underpricing occur in an IPO?

Answer 40

To ensure demand, avoid equity overhang, and create a buoyant aftermarket.

Question 41

What valuation methods underpin IPO price ranges?

Answer 41

Relative (comparable) valuation and intrinsic (DCF) valuation.

Question 42

What two primary routes can managers use to return capital to investors?

Answer 42

Cash dividends and share repurchases (buybacks).

Question 43

How does a buyback affect EPS?

Answer 43

It reduces shares outstanding and increases EPS.

Question 44

What decision rule compares IRR to WACC regarding capital allocation?

Answer 44

Invest in projects when IRR > WACC; otherwise return excess cash.

Question 45

Give two pros of equity financing.

Answer 45

No mandatory payments and operational flexibility.

Question 46

Give two cons of equity financing.

Answer 46

Dilution of ownership and higher implied cost.

Question 47

Give two pros of debt financing.

Answer 47

Tax‑deductible interest reducing WACC and no ownership dilution.

Question 48

Give two cons of debt financing.

Answer 48

Mandatory interest payments increase default risk and covenant restrictions on operations.

Question 49

Differentiate venture capital and buyout funds.

Answer 49

VC invests in early‑stage growth firms; buyout/LBO funds acquire mature businesses using leverage.

Question 50

List three typical PE exit routes.

Answer 50

IPO, sale to strategic buyer, or sale to another sponsor.

Question 51

Name three key metrics to assess debt capacity.

Answer 51

EBITDA level, cash‑interest coverage, and leverage ratios.

Question 52

Which three cost factors feed into WACC example contributions?

Answer 52

% net debt × cost of debt, % equity × cost of equity, summed to WACC.

Question 53

Identify four broad employer categories on the corporate‑finance career map.

Answer 53

Banks (sell side), public accounting, buy‑side institutions, and corporates.

Question 54

What slide tagline describes investment banks in capital raising?

Answer 54

They operate as intermediaries matching capital supply with demand.