CHAPTER 14

QUESTIONNAIRE
Members
1812374 - Melissa Monserrath Treviño Guerrero
1944086 – Miriam Shaday García Rosas
1824594 – Joel Francisco Benítez Reyna

Facultad de economía, UANL

Corporate Finance
1. Define the term “long-term asset”

Assets that will benefit the company for more than one year, it can be tangible or intangible
assets. There are primarily property, plant and equipment.

2. Provide 3 examples of long term assets.

● Fixed assets like property, plant, and equipment, which can include land, machinery,
buildings, fixtures, and vehicles
● Long-term investments such as stocks and bonds or real estate, or investments
made in other companies.
● Trademarks, client lists, patents
● The goodwill acquired in a merger or acquisition, which is considered an intangible
long-term asset

3. What is net working capital?

It is the result of discount the liabilities of the current assets

4. Under which condition(s) might a company face financial difficulty?

When internal cash flow doesn´t cover investment the company faces a financial deficit.

5. What is a financial intermediary?

Is an organization that raises money from investors and provides financing for individuals,
companies, and other organizations, acts as the middleman between two parties in a
financial transaction.

6. Provide 3 examples of financial intermediaries.

• Mutual bonds: pooled collection of assets that invests in stocks, bonds and other
securities
• Pension bunds: financial intermediaries wich offer social insurance by providing income
to the insured persons following the retirement (IMMS)
• Insurance companies: company that creates insurance products to take on risks in return
for the payment of premiums

7. What is common stock?

Represents the owners (shareholders) investment in the business as a capital contribution.

8. In which respects are partnerships units just like the shares in an ordinary
corporation?

Partners are limited partners, the most they can lose is their investment in the company. they
share in the profits of the business and receive cash distributions (like dividends) from time
to time.
9. What is a REIT?

Real estatement investment trusts. allow individuals to invest in large-scale, income-

producing real estate. A REIT is a company that owns and typically operates income-
producing real estate or related assets.

10. What is preferred stock?

Is a type of share that some companies issue. It has not voting rights, but it offers fixed
payments to the investors. The company can choose not to pay dividends but the amount of
the fixed dividend is cumulative. When the company announces that it will be dividends
payout, she must pay all past preferred dividends before any common stock.

11. What is the difference between short-term and long-term debt?

Short-term debt matures in a maximum of one year, usually incurred during a company’s
ordinary business operations, such as payroll or accounts payable, interest rates are
typically higher than on long-term debt, because lenders perceive it as a higher risk. Long-
term debt matures after one year and is usually incurred to finance large investments or
projects, such as buildings or equipment.

12. What is the difference between fixed and floating rate debt?

Fixed debt doesn’t change the interest rate that set’s in the begin, even if the rate goes from
7% to 10% it will be the same 7%. Floating debt rate changes with the LIBOR.

13. What does the acronym LIBOR stand for? What does this interest rate represent?

London Interbank Offered Rate, is the interest rate at which major international banks lend
dollars to each other.

14. What is a Eurobond?

A bond issued offshore by governments or corporates denominated is a currency other than

that of the issuer’s country. Usually long-term debt instruments.

15. What is the difference between a Eurobond and a bond that is denominated in
euros?

Eurobonds are international bonds marketed by London branches of international banks that
may be in dollars, yen, etc. refers only to the fact the bond is issued outside of the currency’s
home country, it doesn’t mean the bond was issued in europe or denominated in the euro
currency.

16. What forms may a lender use to secure its debt? (list at least three forms)

● They may demand that their debt is senior to other debt to be the first in line to be
repaid
● The firm set aside some of its assets for the protection of some creditors.
● The firm provides assurances to them that it will not take unreasonable risks.
17. Arrange the following securities in order of seniority: common stock, senior bond,
subordinated bond

● Senior bond
● Subordinated bond
● Common stock

18. What is the difference between a warrant and a convertible bond?

A warrant gives you the preemptive right to buy to before the set date and convertible bond,
it is a bond you can exchange it for a predeterminated number of shares even if the share
price zoom up or zoom down

19. Name at least two types of company obligations that are not treated as debt and
why they are payment commitments, just like debt is.

● Accounts payable are simply obligations to pay for goods that have already been
delivered and are therefore like short-term debt.
● Rent or lease equipment on a long-term basis; the firm promises to make a series of
lease payments to the owner, just like they would in an outstanding loan.

20. Why is equity a residual claim?

Because left in assets after all liabilities have been paid off

21. What is a financial market?

Is a market where financial assets are issued and traded.

Financial Markets include any place or system that provides buyers and sellers the means to
trade financial instruments, including bonds, equities, the various international currencies,
and derivatives.

22. What is the difference between primary market and secondary market?

In the primary market, companies sell new stocks and bonds to the public for the first time. In
the secondary market, the investors trade their securities to other investors, just a transfer; it
has no effect on the company's cash, assets or operation.

23. How are securities traded in organized exchanges and how is that different from
being traded in the over-the-counter market?

On organized exchanges, financial instruments are traded in accordance with established

rules and regulations, and on the over-the-counter market, financial instruments, such as
stocks, bonds, and derivatives, are bought and sold directly between the parties without the
involvement of a centralized exchange.

24. What types of investment funds are there?

Mutual funds, hedge funds and pension funds.

25. How does a mutual fund work?

Mutual Funds raise money by selling shares to investors, this money is pooled and invested
in a portfolio of securities. Investors can buy additional shares or sell their shares. The
purchase and sale prices depend on the fund’s net asset value (NAV) on the day.
They offer investors low-cost diversification and professional management.

26. What is the main objective of an exchange traded fund?

Get low-cost diversification

27. What is the main difference between a bank and an investment fund?

The key distinction between banks and investment funds lies in their primary functions:
banks offer a range of financial services, including lending and deposit-taking, while
investment funds focus on managing investment portfolios to generate returns for investors.