Corporate Finance: Conceptual Review

What is the main goal of corporate finance?

• To maximize shareholder wealth.

• To maximize societal happiness.

• To increase employee satisfaction.

• To diversify the product portfolio.

What does transaction cost economics primarily examine?

• The cost of capital.

• The cost of marketing and sales.

• The costs associated with organizing economic transactions.

• The cost of producing goods.

According to Modigliani and Miller's Proposition I, what happens in a perfect world free of frictions?

• Capital structure affects firm value.

• Firm value is independent of capital structure.

• Debt financing is always preferred.

• Equity financing is the most effective.

What impact does leverage have on shareholder return in a low ROIC business?

• Decreases shareholder return.

• No impact on shareholder return.

• Increases shareholder return.

• Unpredictable effect on shareholder return.

Why is the cost of equity usually higher than the cost of debt?

• Equity has higher liquidity than debt.

• Equity has a higher priority in bankruptcy.

• Due to higher risk associated with equity.

• Because equity doesn't require repayment.

What does the Weighted Average Cost of Capital (WACC) represent?

• Employee performance and satisfaction.

• The average rate of return investors require from the company.

• The company's credit rating.

• The average return on investments made by the company.

How does tax influence corporate finance decisions?

• Tax has no impact on corporate finance.

• Reducing tax liability can increase firm value.

• Increasing tax liability can benefit the firm.

• Tax only affects public companies.

What is the Hamada equation used for?

• Calculating net income.

• Determining the cost of debt.

• Adjusting the effect of financial risk on equity risk.

• Assessing market competition.

What is a consequence of excessive borrowing by a firm?

• Improved credit rating.

• Potential bankruptcy.

• Increased market share.

• Decreased operating costs.

What does the Tradeoff Theory in corporate finance suggest?

• Debt is always preferable to equity.

• Capital structure is irrelevant.

• There is an optimal amount of debt, balancing tax benefits and financial distress costs.

• Firms should avoid debt entirely.