Corporate Financial Management – Exam 1, Lecture Notes, 2026 – Study
Material and Practice Questions
Cash Flow Identity - correct answer ✔✔ Cash Flow from Assets = Cash flow to creditors + Cash
Flow to Stockholders
Cash Flow from Assets - correct answer ✔✔ Operating cash flow - net capital spending - change
in net working capital
Operating Cash Flow - correct answer ✔✔ EBIT + (depreciation - taxes)
Net Capital Spending - correct answer ✔✔ ending net fixed assets - beginning net fixed assets +
depreciation
Cash Flow to Creditors - correct answer ✔✔ Interest paid - net new borrowing
Cash Flow to Stockholders - correct answer ✔✔ dividends paid - net new equity raised
What is the S&P 500 - correct answer ✔✔ An index of 500 stocks chosen for market size,
liquidity, and industry grouping, etc.
-designed to be a leading indicator of u.s equities
-indicates risk/return
-DECIDED BY WSJ
Debt Capital - correct answer ✔✔ Legal obligation to pay interest, at a specific rate, on the
amount borrowed, as well as the amount at the debt's maturity
, Equity Capital - correct answer ✔✔ An ownership interest usually in the form of common or
preferred stock
Goal of a firm? - correct answer ✔✔ To maximize the current share price
Agency relationship - correct answer ✔✔ A principal hires an agent to represent his/her
interests
-shareholder is principal
-managers are agent
Agency Problem - correct answer ✔✔ Conflict of interests between principal and agent
-managers are inclined to act in their own best interests
Sole Proprietorships and Partnerships - correct answer ✔✔ Advantages:
-easy to form
-fewer regulations
-taxed at only a personal level
Disadvantages:
-difficult to raise capital
-unlimited liability
-limited life
Corporations - correct answer ✔✔ Advantages:
-Unlimited life
-Easy transfer of ownership
-Limited liability
Material and Practice Questions
Cash Flow Identity - correct answer ✔✔ Cash Flow from Assets = Cash flow to creditors + Cash
Flow to Stockholders
Cash Flow from Assets - correct answer ✔✔ Operating cash flow - net capital spending - change
in net working capital
Operating Cash Flow - correct answer ✔✔ EBIT + (depreciation - taxes)
Net Capital Spending - correct answer ✔✔ ending net fixed assets - beginning net fixed assets +
depreciation
Cash Flow to Creditors - correct answer ✔✔ Interest paid - net new borrowing
Cash Flow to Stockholders - correct answer ✔✔ dividends paid - net new equity raised
What is the S&P 500 - correct answer ✔✔ An index of 500 stocks chosen for market size,
liquidity, and industry grouping, etc.
-designed to be a leading indicator of u.s equities
-indicates risk/return
-DECIDED BY WSJ
Debt Capital - correct answer ✔✔ Legal obligation to pay interest, at a specific rate, on the
amount borrowed, as well as the amount at the debt's maturity
, Equity Capital - correct answer ✔✔ An ownership interest usually in the form of common or
preferred stock
Goal of a firm? - correct answer ✔✔ To maximize the current share price
Agency relationship - correct answer ✔✔ A principal hires an agent to represent his/her
interests
-shareholder is principal
-managers are agent
Agency Problem - correct answer ✔✔ Conflict of interests between principal and agent
-managers are inclined to act in their own best interests
Sole Proprietorships and Partnerships - correct answer ✔✔ Advantages:
-easy to form
-fewer regulations
-taxed at only a personal level
Disadvantages:
-difficult to raise capital
-unlimited liability
-limited life
Corporations - correct answer ✔✔ Advantages:
-Unlimited life
-Easy transfer of ownership
-Limited liability
