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FIN60204 – CORPORATE FINANCE TUTORIAL QUESTIONS

TOPIC 1A – CHAPTER 1 (INTRODUCTION TO CORPORATE FINANCE) CONCEPT QUESTIONS 1. List and briefly describe the three basic questions addressed by a financial manager. Answer 1. What long-term investments should the firm choose?  Also known as capital budgeting or investment decisions. Planning and managing a firm’s long term investments (investment size, timing, risk and future cash flows). i.e. consider to open a new branch in other country, purchase a new building or machinery. 2. How should the firm raise funds for the selected investments?  Also known as capital structure or financing decisions. How should the firm pay for their assets? Should the firm use debt or equity? 3. How should short-term assets be managed and financed?  Also known as working capital management. How does the firm manage its day-to-day finances of the firm? Focusing on short term assets and liabilities (CA & CL). i.e. cash, inventory, sell on credit, short term financing.

2. What advantages does the corporate form of organization have over sole proprietorships or partnerships? Answer

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Ease of transferring ownership Owners' have limited liability for business debts, Ability to raise more capital Unlimited life of the business.

3. What should be the goal of the financial manager of a corporation? Why? Answer The correct goal is to maximize the current value of the outstanding stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm. Other goals, such as maximizing earnings, focus too narrowly on accounting income and ignore the importance of market values in managerial finance. 4. Do you think agency problems arise in sole proprietorships and/or partnerships? Answer

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FIN60204 – CORPORATE FINANCE TUTORIAL QUESTIONS

Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management.

TRUE / FALSE QUESTIONS 1. The board of directors is ultimately responsible for all large investment decisions. TRUE 2. A corporation has a legal existence of its own and is based on "articles of incorporation". TRUE 3. Real assets of a corporation are claims on their financial assets. FALSE 4. The treasurer's responsibilities include preparation of financial statements. FALSE 5. In large firms, there is usually a chief financial officer (CFO) who oversees both the treasurer's and the controller's work. TRUE 6. The controller's responsibilities typically include banking relations and cash management. FALSE 7. Managers, shareholders, and the firm's debtholders have identical information about the value of the firm. FALSE

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