1. What is corporate finance?
Corporate finance deals with the financial decisions made by corporations and the tools and analysis used to make these decisions. It includes capital investment decisions, investment in projects, raising capital, and managing corporate assets.
2. What are the three main decisions in corporate finance?
The three main decisions in corporate finance are investment decisions, financing decisions, and dividend decisions.
1. Why are financial statements important for corporate finance?
Financial statements provide essential information about a company's financial performance, position, and cash flows. These statements are vital for decisionmaking, valuation, and assessing the financial health of the company.
2. How do taxes impact corporate finance decisions?
Taxes influence the cost of capital, capital structure decisions, and investment decisions. Understanding the tax implications is crucial for making sound financial decisions.
1. What are the key financial ratios used in corporate finance?
Key financial ratios include profitability ratios (such as ROE and ROA), liquidity ratios (current ratio, quick ratio), leverage ratios (debttoequity ratio, interest coverage ratio), and efficiency ratios (asset turnover, inventory turnover).
2. Why is cash flow analysis important?
Cash flow analysis helps in assessing the liquidity, solvency, and overall financial health of a company. It provides insights into the actual cash generated and used by the company.
1. What is the process of longterm financial planning?
Longterm financial planning involves projecting a company's financial statements and cash flows over a multiyear period to assess the future financial needs and growth opportunities.
2. How does financial planning contribute to corporate growth?
Effective financial planning helps in identifying funding requirements for growth initiatives, evaluating expansion opportunities, and ensuring the availability of resources for longterm strategic plans.
1. Why is the concept of the time value of money important in valuation?
The time value of money recognizes that a dollar received today is worth more than a dollar received in the future due to its potential earning capacity. This concept is fundamental to valuation and investment decisions.
2. How is the time value of money applied in corporate finance?
It is used in discounted cash flow (DCF) analysis, determining bond and stock valuations, capital budgeting decisions, and evaluating investment opportunities.
1. What is discounted cash flow (DCF) valuation?
DCF valuation is a method used to estimate the value of an investment based on its expected future cash flows. It involves discounting these cash flows to their present value using an appropriate discount rate.
2. What are the key considerations in performing a DCF valuation?
Key considerations include forecasting future cash flows, selecting an appropriate discount rate (cost of capital), and determining the terminal value of the investment at the end of the projection period.
1. How do changes in interest rates impact bond valuation?
Bond prices and interest rates have an inverse relationship. When interest rates rise, bond prices fall, and vice versa. Understanding this relationship is crucial for bond valuation and interest rate risk management.
2. What factors determine bond prices?
Bond prices are influenced by prevailing market interest rates, the bond's coupon rate, its maturity, and the bond's credit quality.
1. What are the main approaches to stock valuation?
The main approaches to stock valuation include the dividend discount model (DDM), the earnings capitalization model, and the price/earnings (P/E) ratio approach.
2. How do financial statements contribute to stock valuation?
Financial statements provide essential information such as earnings, dividends, and growth prospects, which are critical inputs for stock valuation models.
1. What is the net present value (NPV) method?
The NPV method compares the present value of a project's expected cash inflows to the present value of its cash outflows. If the NPV is positive, the project is considered acceptable.
2. What are the limitations of the NPV method?
Limitations include the complexity of estimating future cash flows, the need for an appropriate discount rate, and challenges in comparing NPV across projects of different scales and durations.
1. What are the key factors considered in capital investment decisions?
Key factors include estimating project cash flows, assessing risk, determining the appropriate discount rate, and considering qualitative factors that may impact the success of the investment.
2. How does capital budgeting contribute to longterm corporate success?
Effective capital budgeting ensures that a company allocates its resources to projects with the highest potential for creating longterm value, leading to sustainable growth and profitability.
1. What is the Capital Asset Pricing Model (CAPM)?
CAPM is a widely used model for determining the expected return on an investment based on its risk as measured by beta, the riskfree rate, and the expected market return.
2. How is risk incorporated into investment decisions using CAPM?
Investors and companies use CAPM to assess the riskadjusted return on an investment and to make informed decisions about including the investment in their portfolio or undertaking the project.
