FIN 770 | Introduction to Corporate Finance

NAME STUDENT ID Answer the following questions. 1. What are the three types of financial management decisions and what questions are they designed to answer? Capital budgeting is the process of planning and managing a firm's long-term investments. The key to capital budgeting is size, timing, and risk of future cash flows is the essence of capital budgeting. For example, yesterday I received a call from our manager over our Sand & Gravel Operations. He is looking into buying a new crusher (to crush stone into gravel and sand). I helped him today evaluate the return on investment for this opportunity. It quite a lot of work, but we determined that buying the new crusher would bring in 60,000 more tons of production/sales within the 1st year of owning the machine. Capital Structure refers to the specific mixture of long-term debt and equity the firm uses to finance its operations. There are two main questions when looking at the capital structure - 1) How much $ do we need to borrow to buy this long-term asset? 2) What are the least expensive sources of funds for the firm? For example, since we are thinking of buying this new crusher, we need to decide how we are going to afford this new machine. In this example, we determined that if we cut back a little bit on labor and in other areas, we would be able to afford the new machine. In regards to where the money will come from, we do not take out loans to buy long-term assets. We borrow from our company, and repay overtime. Working Capital Management refers to a firm's short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers. This is SCOR E

FIN 770 | Introduction to Corporate Finance

more of an everyday activity. For example, we just converted to a new ticketing system at work. One of the issues we had is how...

2. What are the three major forms of business organization?(3 marks)

A sole proprietorship is the simplest form of business. It is an unincorporated business owned by one individual. Going into business as a sole proprietor is easyone merely begins business operations. However, even the smallest businesses normally must be licensed by a governmental unit. A partnership exists whenever two or more persons associate to conduct a noncorporate business. Partnerships may operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of the state in which the partnership was formed. The major advantage of a partnership is its low cost and ease of formation. The disadvantages are similar to those associated with proprietorships: (1) unlimited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital. The tax treatment of a partnership is similar to that for proprietorships, which is often an advantage, as we demonstrate in Chapter 2.

A corporation is the complex and biggest form of business. It is a legal entity created by a state, and it is separate and distinct from its owners and managers. This separateness gives the corporation three major advantages: (1) Unlimited life. A corporation can continue after its original owners and managers are deceased. (2) Easy transferability of ownership interest. Ownership interests can be divided into shares of stock, which, in turn, can be transferred far more easily than can proprietorship or partnership interests. (3) Limited liability. Losses are limited to the actual funds invested.

3. What is the goal of financial management?(2 marks) 4. What are agency problems and why do they exist within a corporation?(2 marks)

FIN 770 | Introduction to Corporate Finance