Concept.docx

Concept.docx

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Concept

CONCEPTQUESTIONS-CHAPTER1

1.1Whatarethethreebasicquestionsofcorporatefinance?

a.Investmentdecision（capitalbudgeting）:

Whatlong-terminvestmentstrategyshouldafirmadopt?

b.Financingdecision（capitalstructure）:

Howmuchcashmustberaisedforthe

requiredinvestments?

c.Short-termfinancedecision（workingcapital）:

Howmuchshort-termcashflowdoescompanyneedtopayitsbills.

Describecapitalstructure.

Capitalstructureisthemixofdifferentsecuritiesusedtofinanceafirm'sinvestments.

Listthreereasonswhyvaluecreationisdifficult.

Valuecreationisdifficultbecauseitisnoteasytoobservecashflowsdirectly.Thereasonsare:

a.Cashflowsaresometimesdifficulttoidentify.

b.Thetimingofcashflowsisdifficulttodetermine.

c.Cashflowsareuncertainandthereforerisky.

1.2Whatisacontingentclaim?

Acontingentclaimisaclaimwhosepayoffsaredependentonthevalueofthefirmattheendoftheyear.Inmoregeneralterms,contingentclaimsdependonthevalueofanunderlyingasset.

Describeequityanddebtascontingentclaims.

Bothdebtandequitydependonthevalueofthefirm.Ifthevalueofthefirmisgreaterthantheamountowedtodebtholders,theywillgetwhatthefirmowesthem,whilestockholderswillgetthedifference.Butifthevalueofthefirmislessthanequity,bondholderswillgetthevalueofthefirmandequityholdersnothing.

1.3Defineaproprietorship,apartnershipandacorporation.

Aproprietorshipisabusinessownedbyasingleindividualwithunlimitedliability.Apartnershipisabusinessownedbytwoormoreindividualswithunlimitedliability.Acorporationisabusinesswhichisa"legalperson"withmanylimitedliabilityowners.

Whataretheadvantagesofthecorporateformofbusinessorganization?

Limitedliability,eastofownershiptransferandperpetualsuccession.

1.4Whatarethetwotypesofagencycosts?

Monitoringcostsoftheshareholdersandtheincentivefeespaidtothemanagers.

Howaremanagersbondedtoshareholders?

a.Shareholdersdeterminethemembershiptotheboardofdirectors,whichselectsmanagement.

b.Managementcontractsandincentivesarebuildintocompensationarrangements.

c.Ifafirmistakenoverbecausethefirm'spricedropped,managerscouldlosetheirjobs.

d.Competitioninthemanageriallabormarketmakesmanagersperforminthebestinterestofstockholders.

Canyourecallsomemanagerialgoals?

Maximizationofcorporatewealth,growthandcompanysize.

Whatistheset-of-contractsperspective?

Theviewofthecorporationasasetofcontractingrelationshipsamongindividualswhohaveconflictingobjectives.

1.5Distinguishbetweenmoneymarketsandcapitalmarkets.

Moneymarketsaremarketsfordebtsecuritiesthatpayoffinlessthanoneyear,whilecapitalmarketsaremarketsforlong-termdebtandequityshares.

Whatislisting?

ListingreferstotheproceduresbywhichacompanyappliesandqualifiessothatitsstockcanbetradedontheNewYorkStockExchange.

Whatisthedifferencebetweenaprimarymarketandasecondarymarket?

Theprimarymarketisthemarketwhereissuersofsecuritiessellthemforthefirsttimetoinvestors,whileasecondarymarketisamarketforsecuritiespreviouslyissued.

CONCEPTQUESTIONS-CHAPTER2

2.1Whatisthebalance-sheetequation?

Assets=Liabilities+Stockholders'equity

Whatthreethingsshouldbekeptinmindwhenlookingatabalancesheet?

Accountingliquidity,debtvs.equity,andvaluevs.cost.

2.2Whatistheincomestatementequation?

Revenue-expenses=Income

Whatarethethreethingstokeepinmindwhenlookingatanincomestatement?

GenerallyAcceptedAccountingPrinciples（GAAP）,noncashitems,andtimeandcosts.

Whatarenoncashexpenses?

Noncashexpensesareitemsincludedasexpensesbutwhichdonotdirectlyaffectcashflow.Themostimportantoneisdepreciation.

2.3Whatisnetworkingcapital?

Itisthedifferencebetweencurrentassetsandcurrentliabilities.

Whatisthechangeinnetworkingcapital?

Todeterminechangesinnetworkingcapitalyousubtractusesofnetworkingcapitalfromsourcesofnetworkingcapital.

2.4Howiscashflowdifferentfromchangesinnetworkingcapital?

Thedifferencebetweencashflowandchangesinnewworkingcapitalisthatsometransactionsaffectcashflowandnotnetworkingcapital.Theacquisitionofinventorieswithcashisagoodexampleofachangeinworkingcapitalrequirements.

Whatisthedifferencebetweenoperatingcashflowandtotalcashflowofthefirm?

Themaindifferencebetweenthetwoiscapitalspendingandadditionstoworkingcapital,thatis,investmentinfixedassetsand"investment"inworkingcapital.

CONCEPTQUESTIONS-CHAPTER3

3.1Whatisaninterestrate?

Itisthepaymentrequiredbythelenderofmoneyfortheuseofitduringadeterminedperiodoftime.Itisexpressedinpercentage.

Whatareinstitutionsthatmatchborrowersandlenderscalled?

Theyarecalledfinancialinstitutions.

Whatdowemeanwhenwesayamarketclears?

Whatisanequilibriumrateofinterest?

Amarketclearsiftheamountofmoneyborrowerswanttoborrowisequaltotheamountlenderswishtolend.Anequilibriumrateofinterestistheinterestrateatwhichmarketsclear.

3.2Howdoesanindividualchangehisconsumptionacrossperiodsthrough

borrowingandlending.

Byborrowingandlendingdifferentamountsthepersoncanachieveanyofallconsumptionpossibilitiesavailable.

Howdointerestratechangesaffectone'sdegreeofimpatience?

Aperson'slevelofpatiencedependsupontheinterestrateheorshefacesinthemarket.Apersoneagertoborrowmoneyatalowinterestratewillbecomelesseagerifthatinterestrateisraisedandmayprefertolendmoneytotakeadvantageofhigherinterestrates.

3.3Whatisthemostimportantfeatureofacompetitivefinancialmarket?

Noinvestor,individualorcorporationcanhaveasignificanteffectontotallendingoroninterestrates.Therefore,investorsarepricetakers.

Whatconditionsarelikelytoleadtothis?

a.Tradingiscostless.

b.Informationaboutborrowingandlendingopportunitiesisavailable

c.Therearemanytraders.

3.4Describethebasicfinancialprincipleofinvestmentdecision-making?

Aninvestmentprojectisworthundertakingonlyifitismoresdesirablethanwhatisavailableinthefinancialmarkets.

3.5Describehowthefinancialmarketscanbeusedtoevaluateinvestment

alternatives?

Thefinancialmarketscanbeusedasabenchmark.Iftheproposedinvestmentprovidesabetteralternativethanthefinancialmarkets,itshouldbeundertaken.

Whatistheseparationtheorem?

Whyisitimportant?

Theseparationtheoremsaysthatthedecisionastowhethertoundertakeaproject（comparedtothefinancialmarkets）isindependentoftheconsumptionpreferencesoftheindividual.Itisimportantbecausewecanmakeinvestmentdecisionsbasedonobjectivedata,disregardingpersonalpreferences.

3.6Givethedefinitionsofnetpresentvalue,futurevalueandpresentvalue?

Newpresentvalueisthedifferenceinpresentvaluetermsbetweencashinflowsandcashoutflows.Giventhefinancialmarket,thefuturevalueisanamountequivalenttotheamountcurrentlyheld,andpresentvalueistheamountequivalentnowtoanamounttobereceivedorgiveninthefuture.

Whatinformationdoesapersonneedtocomputeaninvestment'snetpresent

value?

Cashinflows,cashoutflowsandaninterestordiscountrate.

3.7Intermsofthenet-present-valuerule,whatistheessentialdifference

betweentheindividualandthecorporation.

Themaindifferenceisthatfirmshavenoconsumptionendowment.

CONCEPTQUESTIONS-CHAPTER4

4.1Definefuturevalueandpresentvalue.

Futurevalueisthevalueofasumafterinvestingoveroneormoreperiods.Presentvalueisthevaluetodayofcashflowstobereceivedinthefuture.

Howdoesoneusenetpresentvaluewhenmakinganinvestmentdecision?

Onedeterminesthepresentvalueoffuturecashflowsandthensubtractsthecostoftheinvestment.Ifthisvalueispositive,theinvestmentshouldbeundertaken.IftheNPVisnegative,thentheinvestmentshouldberejected.

4.2Whatisthedifferencebetweensimpleinterestandcompoundinterest?

Withsimpleinterest,theinterestontheoriginalinvestmentisnotreinvested.Withcompoundinterest,eachinterestpaymentisreinvestedandoneearnsinterestoninterest.

Whatistheformulaforthenetpresentvalueofaproject?

T

NPV=-C0+Ct/（1+I）t

t=1

4.3Whatisastatedannualinterestrate?

Thestatedannualinterestrateistheannualinterestratewithoutconsiderationofcompounding.

Whatisaneffectiveannualinterestrate?

Aneffectiveannualinterestrateisaratethattakescompoundingintoaccount.

Whatistherelationshipbetweenthestatedannualinterestrateandtheeffectiveannualinterestrate?

Effectiveannualinterestrate=（1+（r/m））m-1.

Definecontinuouscompounding.

Continuouscompoundingcompoundsinvestmentseveryinstant.

4.4Whataretheformulasforperpetuity,growing-perpetuity,annuity,and

growingannuity?

Perpetuity:

PV=C/r

GrowingPerpetuity:

PV=C/（r-g）

Annuity:

PV=（C/r）[1-1/（1+r）T]

GrowingAnnuity:

PV=[C/（r-g）][1-（（1+g）/（1+r））T]

Whatarethreeimportantpointsconcerningthegrowingperpetuityformula?

1.Thenumerator.

2.Theinterestrateandthegrowthrate.

3.Thetimingassumption.

Whatarefourtricksconcerningannuities?

1.Adelayedannuity.

2.Anannuityinadvance

3.Aninfrequentannuity

4.Theequatingofpresentvaluesoftwoannuities.

CONCEPTQUESTIONS-C