Corporate Finance Study Set 5

Capital budgeting decisions are used to determine how to raise the cash necessary for investments.

A successful investment is one that increases the value of the firm.

BP's committing of$500 million to partnership with University of California-Berkeley to develop new sources of energy is a capital budgeting decision.

Making good investment and financing decisions is the chieftask of the financial manager.

If a project's value is less than its required investment,then the project is attractive financially.

Pfizer's spending of $7.6 billion in 2006 on research and development of new drugs is a capital budgeting decision but not a financing decision.

LVMH's issuance ofa 7-year bond in 2005,raising 600 million euros,is a financing decision.

Financial assets have value because they are claims on the firm's real assets and the cash that those assets will produce.

Real assets can be intangible assets.

An IOU ("I owe you")from your brother-in-law is a financial asset.

The liability of sole proprietors is limited to the amount of their investment in the company.

General partners have limited personal liability for business debts in a limited partnership.

The separation of ownership and management is one distinctive feature of corporations.

A major disadvantage of partnerships is that they have double taxation of profits.

Boards of directors are often portrayed as active supporters of top management.

The separation of ownership and management is one distinctive feature of both corporations and sole proprietors.

While control of large public companies in the United States is exercised through the board of directors and pressure from the stock market,in many other countries the stock market is less important and control shifts to major stockholders,typically banks and other companies.

Financial analysts are involved in monitoring and controlling the risk associated with investment projects and financing decisions.

The primary goal of any company should be to maximize current period profits.

Maximizing profits is the same as maximizing the value of the firm.