1. Describe the tasks and priorities of a modern corporate finance service
Every single decision made in a business has financial implications, and any
decision that involves the use of money is a corporate financial decision. t is the
discipline of finance that deals with financing, capital structuring, and investment
decisions. It is primarily concerned with maximising shareholder value through
long and short-term financial planning and the implementation of various
strategies.
Corporate finance is split into three sub-sections:
capital budgeting,
capital structure
working capital management.
2. What does the Beta coefficient measure?
Beta (β) is a measure of the volatility or systematic risk of a security or portfolio
compared to the market as a whole (usually the S&P 500). Stocks with betas higher
than 1.0 can be interpreted as more volatile than the S&P 500.
3. What are the constituents of capital invested and capital employed and
what is the economic meaning of these concepts?
Capital employed is the total amount of capital used for the acquisition of profits
by a firm or project. Capital employed can also refer to the value of all the assets
used by a company to generate earnings. Capital employed is calculated by taking
total assets from the balance sheet and subtracting current liabilities, which are
short-term financial obligations.
Invested capital is the investment made by both shareholders and debtholders in a
company. When a company needs capital to expand, it can obtain it either by
selling stock shares or by issuing bonds. For a company, invested capital is a
source of funding that enables them to take on new opportunities such as
expansion. It has two functions within a company. First, it is used to purchase
fixed assets such as land, building, or equipment. Secondly, it is used to cover dayto-day operating expenses such as paying for inventory or paying employee
salaries.
Invested Capital= Net Working Capital+ PPE+ Goodwill and intangibles
Where
Net working capital = current operating assets = Non-interest bearing current
labilities
Goodwill and intangibles are items such as brand reputation, copyrights, and
proprietary technology computer software
4. Should you discount even if there is no inflation and no risk? Why?
Yes, because discounting is used to factor in an interest rate which remunerates the
forgoing of immediate spending. Discounting is thus unrelated to inflation or risk.
5. What is the difference between EBITDA and EBIT in terms of creating
value for owners of a company?
The EBITDA indicator is used to determine the company's ability to service debt,
that is, this indicator, combined with the net profit indicator, served as a source of
information about how much interest payments the company can provide in the
near future.
EBIT measures the profit a company generates from its operations making it
synonymous with operating profit. By ignoring taxes and interest expense, EBIT
focuses solely on a company's ability to generate earnings from operations,
ignoring variables such as the tax burden and capital structure. EBIT is an
especially useful metric because it helps to identify a company's ability to generate
enough earnings to be profitable, pay down debt, and fund ongoing operations.
6. Why does the financial expense (interests and principal debt)/EBITDA
ratio play such a fundamental role in financial analysis?
If there is a debt, we will repay it at the expense of EBITDA.
EBITDA = both principal debt and interest due.
EBITDA is the money that the company has. EBITDA
means a resource for closing interest and principal. That is why the amount of
interest and principal is compared with EBITDA. And this plays a key role in
many financial analyses. That is, we have enough money that the company
generates to pay the principal and interest.
7. Indicate the components of the cash flow, indicate its differences from the
company's net profit, explain the features of cash flow and net profit from the
point of view of the interests of owners of a company.
The three main components of a cash flow statement are cash flow from
operations, cash flow from investing, and cash flow from financing.
The key difference between cash flow and profit is while profit indicates the
amount of money left over after all expenses have been paid, cash flow indicates
the net flow of cash into and out of a business.
Features of CF: Analyzing a company's cash-flow provides critical information
about its financial health, business activities, and reported earnings. Based on the
analysis, future money flows are projected. Consequently, financial analysts plan
short-term goals, long-term goals, working capital, and the optimum cash level
required for business operations.
Features of Net Profit: Net profit reveals the success of a business and its ability to
repay debt and reinvest.
8. What difference is there between sales in a financial year and operating
receipts over the same period?
Sales are the exchange of products or services for money, either paid for now or in
the future. When your business provides a product or service to a customer in
exchange for financial consideration, the business has made a sale and can report
that sale on its financial statements.
Receipts are the amount of cash a business takes in during any one accounting
period, regardless of whether the money came from a sale or other source,
according to IRS rules. Receipts are cash sales, as well as money received in a
customer's account. Receipts also include any cash received in the business from
any source, including investment interest, royalties, leases, a loan or credit line
proceeds or funding from investors. Cash receipts are shown on the cash flow
statement, which helps show how much money is available for the business to pay
its financial obligations.
9. Among the following different flows, which will be appropriated by both
shareholders and lenders: operating receipts, operating cash flow, free cash
flows? Who has priority in each case, shareholders or lenders? Why?
Free cash flows, since all operating or investment outlays have been paid. The
lenders because of contractual agreement.
10. Does sale of goods on credit affect the company’s net income and the
company’s cash position? Why?
Selling on credit may boost revenue and income, but it offers no actual cash
inflow. In the short term, it is acceptable, but in the long term, it can cause the
company to run short on cash and have to take on other liabilities to fund
operations.
11. What does the Capital Asset Pricing Model (CAPM) mean?
The Capital Asset Pricing Model (CAPM) describes the relationship between
systematic risk, or the general perils of investing, and expected return for assets,
particularly stocks. It is a finance model that establishes a linear relationship
between the required return on an investment and risk. The model is based on the
relationship between an asset's beta, the risk-free rate (typically the Treasury bill
rate), and the equity risk premium, or the expected return on the market minus the
risk-free rate.
12. Do equipment valuation methods influence on the company’s net income
and the company’s cash position?
Equipment valuation methods influence the company’s net income. Equipment
valuation methods don’t influence the company’s cash position.
13. What Is the Weighted Average Cost of Capital (WACC)?
The weighted average cost of capital (WACC) is the average rate that a business
pays to finance its assets. It is calculated by averaging the rate of all of the
company's sources of capital (both debt and equity), weighted by the proportion of
each component.
14. What is the difference between liabilities and sources of funds?
Sources of funds include shareholders’equity (which does not have to be repaid
and is consequently not a liability) and liabilities (which sooner or later have to be
repaid).
15. In what calculations is the Weighted Average Cost of Capital (WACC)
used, and why? Why is WACC compared to ROA, and what do the results of
such comparisons say if WACC is greater or less than ROA?
The WACC is used to calculate the discounted present value of cash flows when
they are valued without funding.
When WACC exceeds ROA, this indicates a decrease in economic value added
and an overall loss in company value, and if WACC is less than ROA, this
indicates that assets are being used efficiently and the company's value is growing.
16. How to calculate capital employed and capital invested?
Capital employed=Total assets−Current liabilities=Equity + Non current
liabilities
Capital Invested=Net Working Capital + Net Fixed Assets + Net Intangible
Assets
17. What are the advantages and disadvantages of increasing the stock options
granted to CEOs?
Advantages:
 Ties the employee's financial reward to the success of the business, aligning
the employee's self-interest with the company founder's self-interest
 Does not generally involve company cash and is therefore an attractive
compensation technique
 Allows the Company to better attract and retain key employees
Disadvantages:
 Dilution can be very costly to shareholder over the long run.
 It might be difficult to evaluate stock options.
 Stock options can result in high levels of compensation of executives for
mediocre business results.
 An individual employee must rely on the collective output their co-workers
and management in order to receive a bonus.

18. How to calculate working capital of a company?
Working capital=Current assets-Current liabilities
19. What differences are there between cash flow from operating activities
and operating cash flow?
Unlike operating cash flow, cash flow from operating activities encompasses not
only operations but also financial expense, tax and some exceptional items.
20. Will repayment of a loan (principal and interests) always be recorded on
the income statement? Will it always be recorded under a cash item?
Only the interest portion of a loan payment will appear in income statement as an
Interest Expense. The principal payment of loan will not be included in business'
income statement.
Yes it always be recorded under a cash item, because debts are repaid in cash.
21. What is a breakeven point? What are the types of breakeven points? What
can breakeven analysis be used for?
The break-even point is the point at which total cost and total revenue are equal.
Three different breakeven points may be calculated:
 operating breakeven, which is a function of the company’s fixed and
variable production costs. It determines the stability of operating activities,
but may lead to financing costs being overlooked;
 financial breakeven, which takes into account the interest expense incurred
by the company, but not its cost of equity;
 total breakeven, which takes into account both interest expense and the net
profit required by shareholders. As a result, it takes into account all the
returns required by all the company’s providers of funds.
Break-even analysis is a way to find out the minimum sales volume so that a
business does not suffer losses.
22. Does the inflation-related increase in the nominal value of an asset appear
on the income statement?
No, because of the principle of prudence, which mentions that income and assets
are not overstated in financial statements.
23. What are the types of breakeven points? What does each of them mean?
Three different breakeven points may be calculated:
 operating breakeven, which is a function of the company’s fixed and
variable production costs. It determines the stability of operating activities,
but may lead to financing costs being overlooked;
 financial breakeven, which takes into account the interest expense incurred
by the company, but not its cost of equity;
 total breakeven, which takes into account both interest expense and the net
profit required by shareholders. As a result, it takes into account all the
returns required by all the company’s providers of funds.
24. What are the accounting items corresponding to additions to wealth for
shareholders, lenders and the State?
Financial expense - for lenders.
Net income - shareholders
Corporate income tax - for State
25. What is a contribution margin? What does increase and decrease of it
mean?
The contribution margin shows how much additional revenue is generated by
making each additional unit product after the company has reached the breakeven
point.
If the product's contribution margin is negative, the company is losing money with
each unit produced and should either abandon the product or raise prices.
If a product has a positive contribution margin, then that product is worth keeping.
26. Define a company’s book value
Book value is the net value of a firm's assets found on its balance sheet, and it is
roughly equal to the total amount all shareholders would get if they liquidated the
company.
27. What is economic value added? How can this indicator be calculated?
What does this indicator mean?
Economic value added (EVA) is a measure of a company's financial performance
based on the residual wealth calculated by deducting its cost of capital from its
operating profit, adjusted for taxes on a cash basis.
Economic Value Added=Net Operating Profit After Tax - (Capital Invested ×
WACC)
It is used to measure the value a company generates from funds invested in it. If a
company's EVA is negative, it means the company is not generating value from the
funds invested into the business. Conversely, a positive EVA shows a company is
producing value from the funds invested in it.
28. In your view, should short-term debt be separated out from medium- to
long-term debt on the cash flow statement? Why?
Definitely not, short-term debt should not be separated from medium-term and
long-term debt in the cash flow statement, it helps you keep an idea of the future
state of your business.
29. What indicators characterizing the activity of the company indicate the
creation of value in terms of its economy, market and accounting? Why?
The tools used for measuring creation of value can be classified under three
headings:
 Economic tools, which yield the best results since they factor in returns
required by investors (the weighted average cost of capital) and do not
depend directly on the sometimes erratic price movements of markets. NPV
is the most important of these.EVA, the popular term for economic profit,
measures how much the shareholder has increased his wealth over and
above standard remuneration. However, EVA has the drawback of being
restricted to the financial period in question; EVA can thus be manipulated
to yield maximum results in one period at the expense of subsequent
periods.
 Market tools, which measure MVA (Market Value Added), or the difference
between the company’s enterprise value, its book value,and TSR (Total
Shareholder Returns). TSR is the rate of shareholder returns given the
increase in the value of the share and the dividends paid out. These market
tools are only useful over the medium term, because to be meaningful they
should avoid the market fluctuations that can distort economic reality.
 Accounting indicators, which have the main drawback of being designed for
accounting purposes; i.e., they do not factor in risk or return on equity. They
include Earnings Per Share (EPS) linked to the value of the share by the
Price/ Earnings ratio (P/E), shareholders’ equity linked to the value of the
share by the Price/Book Ratio (PBR), accounting profitability indicators
(shareholders’ equity, Return On Equity – ROE, Return On Capital
Employed – ROCE) to be compared with the cost of equity (or the Weighted
Average Cost of Capital, WACC).
30. On what should you base a choice between two equal discounted values?
If the present values are equal, it makes no difference.
31. What is the beta coefficient of a company and what does its value depend
on?
Beta coefficient can measure the volatility of an individual stock compared to the
systematic risk of the entire market.
The beta coefficient depends on two main parameters that work together:
- the correlation of asset price changes (together with market changes).
- the relative volatility of the selected instrument in relation to the market where it
rotates.
32. Why can the internal rate of return not be used for choosing between two
investments?
Because it does not measure the value created.
33. What is enterprise value? Why does it matter?
Enterprise value (EV) is the total value of a company, defined in terms of its
financing. It includes both the current share price (market capitalization) and the
cost to pay off debt (net debt, or debt minus cash). Combining these two figures
helps establish the company’s enterprise value, indicating the neighborhood you
need to be in to buy the company.
Enterprise Value = Market Cap + Debt – Cash
or
Enterprise value = Value of net debt + Equity value
Businesses use enterprise value to gauge the cost of acquiring a company,
particularly when they have different capital structures. Because EV accounts for
more than just its outstanding by adding debt and subtracting cash from the cost, it
allows for companies to determine how much a company is worth.
34. What is discounting? Why should we discount? What is the discount
factor equal to (formula)?
Discounting is the process of determining the present value of a future payment or
stream of payments.
Discounted cash flow helps investors evaluate how much money goes into the
investment, the timing of when that money is spent, how much money the
investment generates, and when the investor can access the funds from the
investment.
Discount factor = 1/(1+Discount rate)^Period number
35. What is a market approach to business valuation and what multiples are
used? What are the applicable assessment methods? What are the pros and
cons of the market approach?
The market approach is a method of determining the value of business based on the
selling price of similar business.
Within the market approach, there are two primary methods: the guideline public
company method (based on valuation multiples derived from publicly traded
companies in similar industries), and the guideline transactions method (based on
valuation multiples derived primarily from merger & acquisition transactions
involving companies similar to the subject company)
Common valuation multiples include EV (enterprise value) to sales, EV to
EBITDA (earnings before interest, taxes, depreciation, and amortization), and
Price to Earnings (P/E)
Advantages
Based on real market data;
Reflects existing sales and purchase practices;
Takes into account the influence of industry factors on the company's share price
Disadvantages
Insufficiently clearly characterizes the features of organizational, technical,
financial preparation of the enterprise
Only retrospective information is taken into account;
Does not take into account the future expectations of investors
36. On the same loan, is the total amount of interest payable more if the loan
is repaid in fixed annual instalments, by constant amortisation or on
maturity?
On maturity, because the principal is lent in full over the whole period
37. What is an income approach to business valuation? What are the
applicable assessment methods? What are the pros and cons of the income
approach?
The income approach measures the future economic benefits that the company
can generate for a business owner or investor.
There are two income-based approaches that are primarily used when valuing a
business, the Capitalization of CF Method and the DCF Method.
The Capitalization of Cash Flow Method is most often used when a company is
expected to have a relatively stable level of margins and growth in the future. The
DCF method is more flexible than the Capitalization CF Method and allows for
variation in margins, growth rates, debt repayments and other items in future years
that may not remain static. As a result, the Capitalization of Cash Flow Method is
typically applied more often when valuing mature companies with modest future
growth expectations. The Discounted Cash Flow Method is used when future
growth rates or margins are expected to vary or when modeling the impact of debt
repayments in future years.
Advantages
Takes into account future changes in income, expenses;
Takes into account the level of risk (through the discount rate);
Takes into account the interests of the investor
Disadvantages
There are difficulties in predicting future results and costs;
There may be several rates of return, which makes it difficult to make a decision;
Does not take into account the state of the market;
38. What Is Net Present Value (NPV)?
NPV demonstrates the expected future revenue of the project minus its initial cost.
NPV allows you to compare current money with future money, which will cost less
due to inflation.
39. What is an asset approach to business valuation? What are the applicable
assessment methods? What are the pros and cons of the asset approach?
Asset-based valuation is a form of valuation in business that focuses on the value
of a company’s assets or the fair market value of its total assets after deducting
liabilities.
Asset-based valuation is a form of valuation in business that focuses on the value
of a company’s assets or the fair market value of its total assets after deducting
liabilities.
There are 2 approaches to calculate an asset-based valuation:
Going Concern: Under this approach, the business needs to list out its net balance
sheet value of its assets. The value of the company’s assets less liabilities is then
subtracted.
Liquidation Value: In case the business is in the process of liquidating, then it
must quickly calculate its amount of net cash. This is the cash received as soon as
the assets are sold and the liabilities are repaid. It tends to be less than market
value.
40. What Is Enterprise Value (EV)?
Enterprise Value is the entire value of a firm equal to its equity value, plus net
debt, plus any minority interest
41. Advantages and disadvantages of different business valuation approaches
Income approach
Advantages
Takes into account future changes in income, expenses;
Takes into account the level of risk (through the discount rate);
Takes into account the interests of the investor
Disadvantages
There are difficulties in predicting future results and costs;
There may be several rates of return, which makes it difficult to make a decision;
Does not take into account the state of the market;
Market approach
Advantages
Based on real market data;
Reflects existing sales and purchase practices;
Takes into account the influence of industry factors on the company's share price
Disadvantages
Insufficiently clearly characterizes the features of organizational, technical,
financial preparation of the enterprise
Only retrospective information is taken into account;
Does not take into account the future expectations of investors
Cost approach
Advantages
Takes into account the influence of production and economic factors on the change
in the value of assets;
Gives an assessment of the level of technology development, taking into account
the degree of depreciation of assets;
Calculations are based on financial and accounting
documents, so the results of the assessment are more justified
Disadvantages
Reflects past value;
Does not take into account the market situation at the valuation date,
Does not take into account the prospects for the development of the enterprise;
Does not take into account risks;
There are no links with the present and future results of the company's activities
42. Upon what is the Beta coefficient dependent?
It depends on the structure of the company's operating costs, the financial structure,
and the rate of profit growth. It depends on the information policy of the company,
because depending on how fully we give information to the market, the market
evaluates us that way. That is, Beta consists of the assessment of experts who have
certain information, and this information includes the structures of operating costs,
financial structure, profit growth rate and information policy (because this is the
company's information about how it is going to develop).
Beta evaluates both the past and the future, the past can be estimated from actual
data, and the future only from information from the company.
43. What does the Beta coefficient measure?
The Beta coefficient is a measure of sensitivity or correlation of a security or an
investment portfolio to movements in the overall market.
44. What are systematic and non-systematic risks? How do they differ from
each other?
Systematic risk is the underlying risk that affects the entire market.
Unsystematic risk is a risk specific to a company or industry, while systematic risk
is the risk tied to the broader market.
Unlike systematic risks, unsystematic risks can be controlled, minimized, and even
avoided by an organization and systematic risks affect the financial market as a
whole, whereas unsystematic risks are unique to a specific company or investment.
45. What is the terminal value? What are the methods of its calculation and
application?
Terminal value (TV) is the value of an asset, business, or project beyond the
forecasted period when future cash flows can be estimated. Terminal value
assumes a business will grow at a set growth rate forever after the forecast period.
Terminal value often comprises a large percentage of the total assessed value.
Analysts use the discounted cash flow model (DCF) to calculate the total value of
a business. The forecast period and terminal value are both integral components of
DCF.
The two most common methods for calculating terminal value are perpetual
growth (Gordon Growth Model) and exit multiple.
The perpetual growth method assumes that a business will generate cash flows at
a constant rate forever, while the exit multiple method assumes that a business
will be sold.
Most companies do not assume they will stop operations after a few years. They
expect business will continue forever (or at least a very long time). Terminal value
is an attempt to anticipate a company's future value and apply it to present prices
through discounting.
46. It has been said that a solid financial structure was a guarantee of freedom
and independence for a company. Is this true? Are there any exceptions?
Yes, except when the share price is undervalued, in which case there is a risk of
takeover
47. What are the Payback Methods? Explain the difference between them
The payback method evaluates how long it will take to “pay back” or recover the
initial investment.
The main difference between the two methods is that the discounted payback
period takes into account the time value of the factor while the regular payback
ignores it. Under the regular payback period, the cash flows generated by a project
are used at their face value.
48. Assess the liquidity of the following assets in order of decreasing liquidity:
plant, unlisted securities, listed securities, head office building located in
the centre of a large city, ships and aircraft, commercial papers, raw materials
inventories, work-in-progress inventories?
In order of decreasing liquidity: listed securities, commercial paper, raw materials
inventories, head office, unlisted securities, ships and aircraft, work-in-progress
inventories, plant.
49. How to reconcile the results of the three approaches to business valuation?
The cost of a business in each of the approaches may be approximately the same,
or it may differ. After evaluating the three approaches, we need to analyze the pros
and cons of each approach for our company and give each approach a specific
weight.
For example, if a company has many expensive assets and average or poor
performance, more weight could be given to the cost approach. If a company has a
steadily growing income for several years, it is profitable. And if there are many
similar companies on the market and data on them - comparative.
50. On what should you base a choice between two equal discounted values?
If the present value are equal, it makes no difference
51. Why can the internal rate of return not be used for choosing between two
investments?
It ignores the actual dollar value of comparable investments. It does not compare
the holding periods of like investments. It does not account for eliminating
negative cash flows. It provides no consideration for the reinvestment of positive
cash flows.
52. The Beta coefficient measures the specific risk of a security. True or false?
Why?
True, Beta coefficient measures the volatility of a security compared to the market
as a whole. Beta (β), primarily used in the capital asset pricing model CAPM, is a
measure of the volatility–or systematic risk–of a security or portfolio compared to
the market as a whole.