【正文】 is consumption across periods throughborrowing and lending.By borrowing and lending different amounts the person can achieve any of all consumption possibilities available. What are institutions that match borrowers and lenders called? They are called financial institutions. What is the difference between operating cash flow and total cash flow of the firm?The main difference between the two is capital spending and additions to working capital, that is, investment in fixed assets and investment in working capital.CONCEPT QUESTIONS CHAPTER 3 What is the change in net working capital?To determine changes in net working capital you subtract uses of net working capital from sources of net working capital. What are noncash expenses?Noncash expenses are items included as expenses but which do not directly affect cash flow. The most important one is depreciation. What is the ine statement equation? Revenue expenses = Ine equity What is the difference between a primary market and a secondary market?The primary market is the market where issuers of securities sell them for the first time to investors, while a secondary market is a market for securities previously issued.CONCEPT QUESTIONS CHAPTER 2 Distinguish between money markets and capital markets.Money markets are markets for debt securities that pay off in less than one year, while capital markets are markets for longterm debt and equity shares. Can you recall some managerial goals? Maximization of corporate wealth, growth and pany size. How are managers bonded to shareholders?a. Shareholders determine the membership to the board of directors, which selects management.b. Management contracts and incentives are build into pensation arrangements.c. If a firm is taken over because the firm39。 What are the advantages of the corporate form of business organization? Limited liability, east of ownership transfer and perpetual succession. Describe equity and debt as contingent claims.Both debt and equity depend on the value of the firm. If the value of the firm is greater than the amount owed to debt holders, they will get what the firm owes them, while stockholders will get the difference. But if the value of the firm is less than equity, bondholders will get the value of the firm and equity holders nothing. List three reasons why value creation is difficult.Value creation is difficult because it is not easy to observe cash flows directly. The reasons are:a. Cash flows are sometimes difficult to identify.b. The timing of cash flows is difficult to determine.c. Cash flows are uncertain and therefore risky. Describe capital structure.Capital structure is the mix of different securities used to finance a firm39。CONCEPT QUESTIONS CHAPTER 1 What are the three basic questions of corporate finance? a. Investment decision (capital budgeting): What longterm investment strategy should a firm adopt?b. Financing decision (capital structure): How much cash must be raised for the required investments?c. Shortterm finance decision (working capital): How much shortterm cash flow does pany need to pay its bills.s investments. What is a contingent claim?A contingent claim is a claim whose payoffs are dependent on the value of the firm at the end of the year. In more general terms, contingent claims depend on the value of an underlying asset. Define a proprietorship, a partnership and a corporation.A proprietorship is a business owned by a single individual with unlimited liability. A partnership is a business owned by two or more individuals with unlimited liability. A corporation is a business which is a legal person with many limited liability owners. What are the two types of agency costs? Monitoring costs of the shareholders and the incentive fees paid to the managers. s price dropped, managers could lose their jobs.d. Competition in the managerial labor market makes managers perform in the best interest of stockholders. What is the setofcontracts perspective?The view of the corporation as a set of contracting relationships among individuals who have conflicting objectives. What is listing?Listing refers to the procedures by which a pany applies and qualifies so that its stock can be traded on the New York Stock Exchange. What is the balancesheet equation? Assets = Liabilities + Stockholders39。 What three things should be kept in mind when looking at a balance sheet? Accounting liquidity, debt vs. equity, and value vs. cost. What are the three things to keep in mind when looking at an ine statement?Generally Accepted Accounting Principles (GAAP), noncash items, and time and costs. What is net working capital? It is the difference between current assets and current liabilities. How is cash flow different from changes in net working capital?The difference between cash flow and changes in new working capital is that some transactions affect cash flow and not net working capital. The acquisition of inventories with cash is a good example of a change in working capital requirements. What is an interest rate?It is the payment required by the lender of money for the use of it during a determined period of time. It is expressed in percentage. What do we mean when we say a market clears? What is an equilibrium rate of interest?A market clears if the amount of money borrowers want to borrow is equal to the amount lenders wish to lend. An equilibrium rate of interest is the interest rate at which markets clear. How do interest rate changes affect one39。s level of patience depends upon the interest rate he or she faces in the market. A person eager to borrow money at a low interes