Fundamentals Of Corporate Finance

Question 1

What is the Primary goal of financial management ?

Answer 1

• maximise firm value

Question 2

What are the three components of triple bottom line ?

Answer 2

People
Profit
Planet

Question 3

What does capital budgeting involve ?

Answer 3

Planning and managing a firms long term investments

Question 4

What is the mixture of debt and equity a firm uses called ?

Answer 4

Capital structure

Question 5

The role of working capital management ?

Answer 5

Managing the firms short term assets and liabilities

Question 6

What is the relationship between investment, financing and liquidity ?

Answer 6

Cash invested in assets must match cash raised by financing

Question 7

Primary market ?

Answer 7

Where governments and corporations first issue securities

Question 8

Purpose of balance sheet

Answer 8

To show the company’s assets, liabilities and equity

Question 9

Equation which represents the balance between assets, liability and equity

Answer 9

Assets= liabilities + equity

Question 10

Term used when a firm decides to keep some profits to reinvest in the business rather than distribute them to shareholders ?

Answer 10

Retained earnings

Question 11

Goal of financial management often referred to as ?

Answer 11

Maximising current share price

Question 12

Who is responsible for overseeing managers of the firm ?

Answer 12

Board of directors

Question 13

Which theory suggests that managers are stewards of the firm and work to ensure assets are used appropriately for the firms long term success ?

Answer 13

Stewardship theory

Question 14

What does agency theory imply ?

Answer 14

Managers need to be contracted to align with shareholders interests

Question 15

Principle of comply or explain?

Answer 15

Companies must comply with regulations or explain why they choose not to

Question 16

Risk associated with cash flows ?

Answer 16

Timing

Question 17

Terms for the practice of offering new equity to existing shareholders first, before public

Answer 17

Pre-emptive rights

Question 18

Which market involves buying and seeking securities after the initial public offering ?

Answer 18

Secondary market

Question 19

The process of managing a firms short term assets and liabilities is known as ?

Answer 19

Working capital management

Question 20

What does the sarbanes- oxley act regulate in the us ?

Answer 20

Corporate governance policies

Question 21

which of the following if the primary goal of financial management in investments decisions ?
-maximising profits
-increase market share
-maximising the value of equity
-reducing costs

Answer 21

Maximising value of equity

Question 22

Capital budgeting primarily focuses on ?
Short term investments
Long term investments
Liquidity management
Dividend policy

Answer 22

Long terms investments

Question 23

Which of the following is not a step in capital investment process ?
Identification of investment opportunities
Evaluation of competitors
Post audit
Selection of most lucrative project

Answer 23

Evaluation of competitors

Question 24

NPV is calculated by ?

Answer 24

Subtracting the present value of the cash outflows from the Preston value of the cash inflows

Question 25

A project should be accepted according to NPV decision rule if its NPV is ? Equal to zero Greater than zero Less than zero Equal to initial investment

Answer 25

Greater than zero

Question 26

Strength of NPV method ?

Answer 26

Discounts all cash flows properly

Question 27

Payback period measures ?

Answer 27

The time required for an investment to generate enough cash flows to recover its initial cost

Question 28

Discounted payback period method considers ?

Answer 28

Time value of money

Question 29

Profitability index (PI)

Answer 29

The present value of an investments future cash flows divided by its initial cost

Question 30

A PI greater than 1 indicates that ?

Answer 30

The projects benefits exceed its costs

Question 31

Disadvantage of payback period

Answer 31

Ignores time value of money

Question 32

In discounted payback period method, project is accepted if ?

Answer 32

Discounted payback period is LESS than the benchmark

Question 33

What is true about NPV and Profitability Index ?

Answer 33

They use the same inputs and thus yield consistent decisions

Question 34

Main focus of capital budgeting

Answer 34

Evaluating long term investment opportunities

Question 35

Which investment criteria is considered easiest to compute but least theoretically robust ?

Answer 35

Payback period

Question 36

How does discounted payback period differ from payback period ?

Answer 36

It accounts for time value of money

Question 37

If a projects NPV is zero ?

Answer 37

The projects rate of return equals the discount rate

Question 38

Which cash flows should be included in a projects analysis when using the stand alone principle ?

Answer 38

All cash flows that are incremental to the project

Question 39

How should the side effect of erosion be treated in capital budgeting ?

Answer 39

It should be included as a cost to the new project

Question 40

What is meant by incremental cash flows in capital budgeting ?

Answer 40

The additional cash flows generated by taking on a new project

Question 41

Which principle states that a projects NPV should be evaluated based on its own incremental cash flows ?

Answer 41

Stand alone principle

Question 42

Definition of opportunity cost in the context of capital budgeting ?

Answer 42

Most valuable alternative given up when a projects is undertaken

Question 43

Why is it important to exclude non-incremental cash flows when making capital budgeting decisions ?

Answer 43

They don’t change regardless of the project decision

Question 44

What effect does a higher salvage value have on depreciation expense ?

Answer 44

Decreases annual depreciation expense

Question 45

What effect does a lower salvage value have on depreciation expense ?

Answer 45

It increases the annual depreciation expense

Question 46

Which depreciation method allows for an accelerated write off of assets over their useful life ?

Answer 46

Reducing balance method

Question 47

Which method in calculating Operating Cashflow starts with net income and adds back depreciation?

Answer 47

Bottom-up approach