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Finance 3332 Exam 1 Study Guide Chapter 1,3, Part of 4

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Finance 3332 Exam 1 Study Guide Chapter 1,3, Part of 4 FINA 3332

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About this Document

This study guide covers chapters 1, 3, and part of 4.
Prin of Financial Managment
Darla Chisholm
Study Guide
finance, EXAM1STUDYGUIDE, chapter1, Chapter3, chapter4, Formulasheet, calculatorsetting, Practiceproblems
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This 15 page Study Guide was uploaded by Notetaker on Wednesday September 14, 2016. The Study Guide belongs to FINA 3332 at University of Houston taught by Darla Chisholm in Fall 2016. Since its upload, it has received 339 views.

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Date Created: 09/14/16
Finance 3332  Formula Sheet for Exam 1 Finance 3332 Study Guide Chapter 1 Why Study Finance?  To finance your money  4 Types of Firms: 1. Sole Proprietorship: Owned and run by one person a. Owner has unlimited liability for firm’s debt b. No separation between firm and the owner c. Owner can’t expand if he doesn’t have money  d. Disadvantage outweighs the sole proprietorship advantages   e. (look at page 5, figure 1.1, it is good to have an idea of the graph) 2. Partnership: Owned and run by more than 2 people  a. 2 or more partners  b. All partners are liable for firm’s debt c. Partners can avoid liquidation if partner withdraws  d. General partners => actual run business, personally liable for the  firm’s debt e. Limited partner => limited in Liability (limited to their  investments)/influence the company, cannot be involved in decision  making,  3. LLC/LLP (Limited Liability Companies/Partner): Limited partnership but  with no general partner  a. No general partner b. Owners have limited liability, but unlike limited partners, LLC/P can  run the business 4. Corporations: separate from its owners.  a. Can enter contract, acquire asset b. Can make/break contracts c. No liability, (if company goes bankruptcy stockholders don’t have to  pay) d. Corporations pay taxes and stockholders pay taxes.    Look at page 9 Table 1.1 (Characteristics of the Different Types of Firms) The goal of Financial Managers => to maximize the wealth of the owners, the  stockholders.  Example 1.1 page 8 Solution  Earnings before tax= $5 Corporate tax rate= 40% Dividend tax rate= 15% $ 5.00 x 40%= $2.00 => $5­$2= $3   $3 x 15%= $3 ­ .45= $2.55  Another way: Before Tax(1­tax rate)= after tax Earnings before tax= $5 Corporate tax rate= 40% Dividend tax rate= 15% Paid out ratio= 100% $5(1­40%)(100%)(1­15%)=$2.55 Example 1.1C Solution (check the Professors Slide)  Earnings before tax= $5 Corporate tax rate= 40% Dividend tax rate= 28% Paid out Ratio= 75% $5(1­40%)(.75)(1­28%)= $1.62 Example 1.2 page 9 Solution Taxation of S Corporation Earnings. Since it is a S corporation it only gets taxed  once which is the rate of your non­dividend income.  $5 x 30% = $3.50 Financial Managers have 3 main task:  Make investment decisions  Make finance decisions  Manage cash flow from operating activities   Dividend policy decision Net Working capital = Current Asset – Current Liability  Primary Markets: issuer of security   Treasury bill=> short term (less than a year)  Treasury Notes=> intermediate terms  Treasury Notes=> long term (greater than 10) Dealer  Investor  Ask  Sell  Buy  Bid  Buy  Sell   Investor would buy at higher (ask price) and sell at a (bid price) Investor buys at lower and sells at high   Bid prices is always lower than ask prices Other Financial Market:  Bond Market  Foreign Exchange market   Commodities Market  Derivatives Securities  Look over the Financial Cycle on page 19­20, look over Figure 1.4 Role of Financial Institutions  Move funds from savers to borrowers   Move funds through time  Help spread out risk­bearing Look over Table 1.2 (Financial Institutions and their Roles in the Financial Cycle)  page 21  Chapter 3 (Page 71) Study Guide  Role of Financial Manager  Make decisions on behalf of the firms investor  Open Chapter 3 Slides 3­5=> Research and development is missing this skill on  slide  If Benefit > Cost then it increase value of the Firm  Competition market => price determine the value of the good  The Valuation Principal (page 74)   The value of a commodity or an asset to the firm or its investors is  determined by its competitive market price.  When dealing with values, never add or subtract cash flows across time until you  have the same value Example:  If you have $100,000 today what is your Future Value in one year  Example 2: (Chapter 3 Slides)  What is the cost of a delay in terms of dollars in 2005?  Example 3:  (Chapter 3  Slides)  Valuing Cash Flows at Different Points in Time  There are 3 Rules you have to Follow:  1. Rule 1: Comparing and Combining Values a. It is only possibleto compare or combine values at the same point in  time 2. Rule 2: Compounding:  a. To calculate a cash flow of future value, you must compound it  b. Compound interest =>  “interest on interest”  i. Two Types if  Interest  1. Simple Interest:  2. Compound Interest  3. Rule 3: Discounting: a. To calculate the value of a future cash flow at an earlier point in time,  we must discount it.  Review Questions for Exam 1 Solutions  Calculator Setting  1. Set to Floating decimals  a. 2  format=> DEC= 2.00 2. Set to enndof period Cash flow (when talkind about Annuity) a. 2  PMT => end of period => 2  set again => beginning  3. Set to one payment per period  nd a. 2  1/Y 1 enter (not the = sign, the button enter)  Don’t forget to look over: 1. The Accounting Quiz located on BB 2. MyFinanceLab Study Plan, go over some practice Problems 3. Read the Chapters, Practice some example questions and GOOD LUCK!!!


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