Introduction

Question 1

Real assets

Answer 1

Assets used to produce goods and services.
Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources

Question 2

Financial Assets

Answer 2

Financial claims to the income generated by the firm’s real assets.
Financial Assets are highly liquid assets that are either in cash or can be fast converted to cash. They include investments such as stocks and bonds.

Question 3

Why real asset?

Answer 3

Real assets offer the opportunity for diversification, inflation hedging, and competitive total return potential
machines and knowledge are real assets

Question 4

Investment decision

Answer 4

1. Purchase of real assets,
2. how to best allocate capital to maximize their value.
   An investment decision can be long-term, also known as capital budgeting.

Question 5

Financing decision

Answer 5

1. Sale of financial assets,
2. Pay for investments and expenses. Companies can use existing capital, borrow, or sell equity.
3. It involves the identification of various sources of finance and the quantum of finance to be raised from long-term and short-term sources.

Question 6

Why separation important between financing and investing decisions?

Answer 6

1. because we have to make a very important adjustment based on this principle.
2. That adjustment is the fact that we do not subtract interest costs while calculating the cash flows that a project will generate.

Question 7

Capital budgeting decision

Answer 7

A capital budgeting decision is both a financial commitment and an investment. By taking on a project, the business is making a financial commitment, but it is also investing in its longer-term direction that will likely have an influence on future projects the company considers.

Question 8

Capital budgeting decision 2

Answer 8

1. creates accountability and measurability.
2. the capital budgeting process is a measurable way for businesses to determine the long-term economic and financial profitability of any investment project.

Question 9

Capital budgeting decision 3

Answer 9

1. The decision to invest in tangible or intangible assets
2. Also called the investment decision
3. Also called capital expenditure or CAPEX decisions

Question 10

Financing Decisions

Answer 10

1. Shareholders are equity investors.

2. Capital structure decision

Question 11

Shareholders are equity investors.

Answer 11

Contribute equity financing

Question 12

Capital structure decision

Answer 12

1. The choice between debt and equity financing

2. Capital refers to a firm’s sources of long-term financing

Question 13

Capital structure decision 2

Answer 13

Capital Structure, as the name suggests, means arranging capital from various sources, in order, to meet the need of long-term funds for the business.

Question 14

The goal of the capital structure decision

Answer 14

is to determine the financial leverage that maximizes the value of the company (or minimizes the weighted average cost of capital).

Question 15

Types of Corporations

Answer 15

1. Public companies
2. Private corporations
3. Limited liability corporations (LLC)

Question 16

Public companies

Answer 16

ownership is organized via shares of stock that are intended to be freely traded on a stock exchange or in over-the-counter markets.

Question 17

Private companies

Answer 17

Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO).

Question 18

Limited liability corporations (LLC)

Answer 18

owners are not personally liable for the company’s debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.

Question 19

Types of business organizations

Answer 19

1. Sole proprietorships
2. Partnerships
3. Corporations
4. Limited liability options
   A. Limited liability partnerships
   B. Limited liability companies
   C. Professional limited liability companies

Question 20

Sole proprietorships

Answer 20

has just one owner who pays personal income tax on profits earned from the business

Question 21

Partnerships

Answer 21

n a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability.

Question 22

Corporation

Answer 22

the corporation is a legal entity that is separate and distinct from its owners. 1 Corporation enjoy most of the rights and responsibilities that individuals possess

Question 23

Limited liability

Answer 23

The owners of a corporation are not personally liable for its obligations.

Question 24

Flow of Cash between Financial Markets and the Firm’s Operations

Answer 24

1. Cash raised by selling financial assets to investors
2. Cash invested in the firm’s operations and used to purchase real assets
3. Cash generated by the firm’s operations
   (a) Cash reinvested (b) Cash returned to investors

Question 25

The flow of Cash between Financial Markets and the Firm’s Operations

Answer 25

1. Firm Operation (real assets) 2. Financial manager 3. Financial markets (financial assets)

Question 26

Stockholders want three things

Answer 26

1. To maximize current wealth. 2. To transform wealth into the most desirable time pattern of consumption. 3. To manage risk characteristics of a chosen consumption plan.

Question 27

The Financial Goal of the Corporation Continued

Answer 27

shareholder stockholder The investment trade-off

Question 28

Profit maximization, Not a well-defined financial objective

Answer 28

1. Which year’s profits? Shareholders will not welcome higher short-term profits if long-term profits are damaged 2. Company may increase future profits by cutting year’s dividend, investing freed-up cash in the firm Not in shareholders’ best interest if the company earns less than the opportunity cost of capital

Question 29

Agency problem

Answer 29

represent the conflict of interest between management and owners

Question 30

The investment trade-off

Answer 30

1. Hurdle rate/cost of capital Minimum acceptable rate of return on investment 2. Opportunity cost of capital Investing in a project eliminates other opportunities to use invested cash

Question 31

Agency cost

Answer 31

Value lost from agency problems or from the cost of mitigating agency problems

Question 32

Corporate governance

Answer 32

The laws, regulations, institutions, and corporate practices that protect shareholders and other investors