Corporate Finance Exam Questions With
Answers Graded A+
Goal of Financial Management
maximize shareholder wealth
Three questions of financial management
1. What long-term
investments should the firm make?
2. How should
the firm finance these long-term investments?
3.How should the firm manage its short-term or operating cash flows?
internal investment
Human Resources , research and development ,capital assets
Capital Structure
the mixture of debt and equity maintained by a firm
Statements
Statement of Financial Position
Statement of Cash Flow
Income Statement
Agency Costs
the costs of the conflict of interest between stockholders and management
Financial Instruments
include shares, bonds, derivatives, commodities, and currencies.
Financial intermediaries
include institutions such as commercial banks, insurance companies, and pension funds (indirect
intermediaries)
market intermediaries
match lenders with borrowers without changing the nature of the underlying financial asset (direct
intermediaries). Examples include mortgage brokers
Capital markets
Markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
Bond
A bond is a debt instrument that has a fixed interest rate and maturity date
Primary Market
The primary market is where the new issues of shares and bonds are made.
, Secondary Market
the market in which previously issued securities are traded among investors
over-the-counter market (OTC)
issued securities that are not traded on an exchange can be bought and sold, usually by dealers.
Generally, the type of shares that trade on this market are for small companies that do not meet the
listing requirements
Regulators
The three main regulators in Canada are the provincial securities commissions in Ontario, Quebec,
and British Columbia.
money market
market in which money is lent for periods of less than a year (Example: term deposits, treasury bills,
and commercial paper)
efficient capital market
prices of securities traded regularly in the market fully reflect available information related to their
valuation and adjust quickly to new information.
intrinsic value of an option
determined by the present value of all expected future cash flows from the security. In an efficient
market, the market price of a security is equal to its intrinsic value
prospectus
a written document outlining the amount of funds to be raised in the offering, the nature and terms
of the securities to be issued, the use of the funds, a description of the issuer's business and strategy,
and historical financial statements
unseasoned offering
The name for a primary offering if the company has never before offered securities to the public.
seasoned offering or a secondary offering
entity is issuing new securities, but the company is already traded on the public stock exchange,
Private placement
the securities issue is sold to a group of institutional investors such as an insurance company, pension
plan, or mutual fund. (no prospectus required), but instead provides an offering memorandum
Seven key steps for sale of securities
1. The board of directors must approve the issuance and determine the type of offering (private
placement or public offering).
2. An investment bank is hired to act as the underwriter for the offering. 3. For a private placement,
an offering memorandum is prepared by the investment bank. 4. For a public offering, the cash offer
method or rights offer method must be chosen.
Answers Graded A+
Goal of Financial Management
maximize shareholder wealth
Three questions of financial management
1. What long-term
investments should the firm make?
2. How should
the firm finance these long-term investments?
3.How should the firm manage its short-term or operating cash flows?
internal investment
Human Resources , research and development ,capital assets
Capital Structure
the mixture of debt and equity maintained by a firm
Statements
Statement of Financial Position
Statement of Cash Flow
Income Statement
Agency Costs
the costs of the conflict of interest between stockholders and management
Financial Instruments
include shares, bonds, derivatives, commodities, and currencies.
Financial intermediaries
include institutions such as commercial banks, insurance companies, and pension funds (indirect
intermediaries)
market intermediaries
match lenders with borrowers without changing the nature of the underlying financial asset (direct
intermediaries). Examples include mortgage brokers
Capital markets
Markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
Bond
A bond is a debt instrument that has a fixed interest rate and maturity date
Primary Market
The primary market is where the new issues of shares and bonds are made.
, Secondary Market
the market in which previously issued securities are traded among investors
over-the-counter market (OTC)
issued securities that are not traded on an exchange can be bought and sold, usually by dealers.
Generally, the type of shares that trade on this market are for small companies that do not meet the
listing requirements
Regulators
The three main regulators in Canada are the provincial securities commissions in Ontario, Quebec,
and British Columbia.
money market
market in which money is lent for periods of less than a year (Example: term deposits, treasury bills,
and commercial paper)
efficient capital market
prices of securities traded regularly in the market fully reflect available information related to their
valuation and adjust quickly to new information.
intrinsic value of an option
determined by the present value of all expected future cash flows from the security. In an efficient
market, the market price of a security is equal to its intrinsic value
prospectus
a written document outlining the amount of funds to be raised in the offering, the nature and terms
of the securities to be issued, the use of the funds, a description of the issuer's business and strategy,
and historical financial statements
unseasoned offering
The name for a primary offering if the company has never before offered securities to the public.
seasoned offering or a secondary offering
entity is issuing new securities, but the company is already traded on the public stock exchange,
Private placement
the securities issue is sold to a group of institutional investors such as an insurance company, pension
plan, or mutual fund. (no prospectus required), but instead provides an offering memorandum
Seven key steps for sale of securities
1. The board of directors must approve the issuance and determine the type of offering (private
placement or public offering).
2. An investment bank is hired to act as the underwriter for the offering. 3. For a private placement,
an offering memorandum is prepared by the investment bank. 4. For a public offering, the cash offer
method or rights offer method must be chosen.
