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FIN 304 Exam 1 Study Guide

by: doyewole

FIN 304 Exam 1 Study Guide FIN 304


GPA 3.03

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About this Document

A study guide that includes basic concepts that will be covered on the first mid-term exam.
Introduction to Corporate Finance
Wenyuh Tsay
Study Guide
finance, midterm, business, Math
50 ?




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This 4 page Study Guide was uploaded by doyewole on Friday September 30, 2016. The Study Guide belongs to FIN 304 at California State University - San Marcos taught by Wenyuh Tsay in Fall 2016. Since its upload, it has received 51 views. For similar materials see Introduction to Corporate Finance in Finance at California State University - San Marcos.


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Date Created: 09/30/16
FIN 304: Study Guide for Midterm Exam I I. Financial statements and cash flows 1. Balance sheet - total assets as the accumulative result of past investments - total liabilities as the sources of funding to support the past investments - net working capital = CA – CL - order on the balance sheet: liquidity of assets and time to maturity of liabilities - book value versus market value (of liabilities and equity) 2. Income statement - accounting realization principle for revenue and matching principle for costs - the recognition of both revenues and costs may not coincide with the actual cash flow timing 3. Taxes: marginal taxes and average taxes - Marginal tax rate are relevant in evaluating new investment projects which will bring in additional income to the company 4. Cash flow - lifeblood of an enterprise and the relevant number in most of financial analyses - use the cash flow identity to calculate cash flow -> cash flow from assets = cash flow to creditors + cash flow to shareholders -> cash flow from assets = operating cash flow – net capital spending + increase in net working capital 5. Sources and uses of cash - activities that bring in cash are sources - activities that involve cash outflows are uses -> Are you able to identify sources and uses of cash by examining the balance sheets and income statement of a company? II. Time value of money and discounted cash flow 1 1. The case of single cash flow - The basic equation: FV = PV * (1+r)^t - There are four parameters in the equation: PV, FV, r, and t -> Given three of them, you should be able to solve the unknown! - PVIF (r,t) and FVIF (r,t) are reciprocals of each other - a side question: the difference between the simple interest and compound interest - the rule of 72 2. The case of multiple cash flows A. the basic approach -Calculate the PV (or FV) of each cash flow on the time line, then add them together to get the total PV (or FV) of the multiple cash flows B. Special cash flow streams and their formula - perpetuity, annuity, growing perpetuity C. Many practical financial analyses are related to the case of annuities - there are four parameters in the basic formula: APV (annuity present value) or AFV (annuity future value), PMT (payment), r, and t -> Again given three of them, you should be able to solve/find the unknown! D. APR (annual percentage rate) and EAR (effective annual rate) E. Amortization schedule: fixed payment and fixed principal - Could you calculate the monthly home mortgage payments given the size of loan and the terms of the mortgage loan (interest rate and years)? - What are the total interests paid over the life of the loan? F. Application: home mortgage loan application - Loan-to-value (LTV) ratio and Payment-to-income (PTI) ratio - Will you qualify for a loan based on the PTI ratio? III. Bond valuation 1. Basics - What is a bond? - basic terminology of bonds: coupon rate (CR), face value, time to 2 maturity, current yield, yield to maturity (YTM) - what are the cash flows of a bond? 2. Basic valuation equation - bond price = PV (coupons as an annuity) + PV (face value as a future value) - discount and premium bonds: comparison between CR and YTM 3. Price curve and interest rate risk - there is an inverse relationship between bond price and YTM - comparison of price changes between bonds of different time to maturity 4. Others - adjustments in calculation from annual coupon bonds to semi-annual coupon bonds - How to estimate the YTM with an approximate formula? - Could you read the bond price quotation from the financial publication such as the Wall Street Journal? IV. Stock valuation 1. Differences of stock valuation from bond valuation - cash flows are not explicitly given - time horizon is not finite (no time to maturity) - more difficult to estimate the appropriate discount rate 2. From a general valuation model to specific dividend discount models - zero-growth - constant growth - non-constant growth = based on the constant growth dividend discount model, the stock price is in general a function of three parameters: D (dividend), r (discount rate), and g (dividend growth rate); i.e., Price = f (D, r, t) 3. Others - Required rate of return can be derived from the formula of constant growth dividend discount model - How to estimate the stock price of a company which has not paid dividends? See one example in the notes. - Could you read the stock price quotation from the financial publication 3 such as the WSJ? V. Important Concept: The Law of One Price (LOOP) 1. The meaning and example of the LOOP 2. Application of the LOOP in asset pricing in the financial markets - pricing by comparables 4


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