Corporate Finance 1

Which of the following decisions is a corporate finance decision?

• A change in pricing strategy

• A decision to carry less inventory (even if it means lost sales)

• All of the above

• None of the above

Answer explanation

All of the listed

are corporate

finance decisions,

since they all

require financial

resources.

Assume that you are investing in a company that derives its value primarily from growth assets. Given the description of growth assets as the value of investments that you expect the firm to make in the future, which of the following would you expect to see in terms of the rest of corporate finance?

• The firm is funded with a lot of debt and pays little out to its stockholders

• The firm is funded with primarily equity and pays out large amounts to its stockholders

• The firm is funded with primarily equity and pays little out to its stockholders

• The firm is funded with a lot of debt and pays out large amounts to its stockholders

Answer explanation

You do not have much in assets, you cannot allow debt and you need to reinvest all your cash back to the firm to ensure growth (so you cannot return cash to shareholders

In the big picture of corporate finance, the first big piece is the investment decision. Which of the following best characterizes that decision?

• Firms should take investments that make them more profitable

• Firms should take investments that generate the most cash flows

• Firms should take investments that earn the highest returns

• Firms should take investments that earn returns greater than the risk free rate

• Firms should take investments that earn returns greater than the risk adjusted hurdle rate

In the big picture of corporate finance, the financing principle lays out how firms should approach raising debt. If you follow that principle, which of the following is your best choice to borrow?

• Debt with the lowest interest rate attached to it

• Debt in the same currency that your cash flows are in

• The longest term debt that you can get

• The shortest term debt that you can get

• Debt in the your local currency

Answer explanation

Debt should match to assets, otherwise default probability increases

In the big picture of corporate finance, the dividend principle states that firms should return as much cash as they can to their owners. If firms followed this principle, which of the following would you expect to observe?

• Firms will pay out all of their earnings as dividends/stock buyback

• Firms will not pay out any of their earnings to stockholders

• Firms that have high earnings and low growth potential will return more cash to stockholders.

• Firms that have high earnings and high growth potential will return more cash to stockholders

• None of the above

firm either keep and reinvest cash or return it to investor?

(a)  

• Investment trade off
• cost of return
• herded rate
• retained earning

What is the major advantage corporations have over other business entities?

• It is easier for a corporation to raise capital than other forms of businesses.

• A corporation is treated as a separate legal entity for tax and legal purposes.

• A corporation's shares can be freely traded among its shareholders.

• All of the above are advantages that a corporation has over other business forms.

For an unlevered firm, the cost of capital can be determined by using the ________.

• yield on the traded debt

• Capital Asset Pricing Model

• dividend yield

• preferred stock yield

The minimum acceptable rate of return on an investment is called the:

• Risk

• Opportunity cost of capital

• Capital structure decision

• Interest rate

Assets such as equipment and raw materials are referred to as:

• Dividends

• Securities

• Financial assets

• Real assets