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UNR / OTHER / FIN 301 / finance 301 exam 1

finance 301 exam 1

finance 301 exam 1

Description

School: University of Nevada Reno
Department: OTHER
Course: Principles of Managerial Finance
Professor: Thomas liesz
Term: Spring 2018
Tags: finance
Cost: 50
Name: Fin 301 Study Guide, Midterm #1
Description: Chapters 1-3 on this study guide.
Uploaded: 02/12/2018
5 Pages 7 Views 8 Unlocks
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Mike Clarke 


What are the three important concepts that underline managerial finance?



Finance 301 

CHAPTER 1:

*Understand the 3 Foundations of Finance 

­Economics, Accounting, Statistics

*The goal of Finance is to Maximize the wealth of the business’s owners (Shareholders) by  maximizing the value per share of the firm’s stock price.

*Understand the 3 Important Concepts that Underlie Managerial Finance: ­More value is preferred to less

­The sooner cash is received, the more valuable it is

­Less risky assets are more valuable than riskier assets

*Understand the 3 Decisions

­Investment Decision: 

Invest in projects (assets) that yield a return greater than some minimum                 acceptable rate. 

­Financing Decision: 

      Choose a mix of finance sources (equity and debt) that maximizes the value of the firm.

­Dividend Decision:


What is the importance of the three decisions?



If there are not enough investments that create value, return the cash to the             owners.

*The Agency Problem 

­Agency Relationship:

­A “principal” hires an “agent” to represent his/her interests.

­Stockholders (Principals) hire managers (agents) to run the company

­Agency Problem:

­Conflict of interest between principal and agent, i.e. do managers always work in the best interests of the stockholders?

­Agency costs are borne by the stockholders

­Agency costs:

­Direct agency costs include compensating a Board of Directors and the cost of  various types of risk aversion tactics, such as insurance and management  compensation.

­Indirect agency costs include the opportunity cost of managers foregoing  investment opportunities that could have ultimately added value to the firm. ­Shareholders (owners) are made up of two broad classifications:


What is the goal of finance?



We also discuss several other topics like math 241 oregon state

­Individual investors

­Institutional investors (Mutual funds, banks, pension funds) We also discuss several other topics like pain scake

CHAPTER 2:

*A financial market is made up of groups of “players”, called sectors, such as: ­Households (Individuals)

­Corporations (Businesses)

­Governments (Both domestic and foreign)

*Suppliers, especially the household sector, tend to save or invest funds in relatively small increments.

­Demanders, especially Businesses and Domestic Governments, require funds in  large increments.

­For small amounts, Direct transfers can occur.

­For large amounts, Indirect transfers are necessary

*A Security is a investment instrument issued by a corporation, government, or other  organization which offers evidence of debt or equity. If you want to learn more check out uwga

*Markets can be described by:

­Type of securities (equity vs debt)

­Maturity of securities(Money vs Capital)

­Whether the securities are being sold for the first time (Primary) or being resold  (Secondary)

­Developed vs Emerging markets

CHAPTER 3:

*Types of Ratio Comparisons:

­Cross­sectional Analysis (aka “Peer Group Analysis” or “Benchmarking”) compares  different firms at the same point in time.

­The benchmark can be industry standards, closest peer competitors, or internally­derived goals.

­Time­Series Analysis evaluates the performance of the same firm over time with the  focus upon any trends, both positive and negative. If you want to learn more check out Question #1 What is a system?

TIE (Times Interest Earned) = EBIT (Operating Income) / Interest

EBIT= Sales­Expenses = Operating income If you want to learn more check out replacement fertility ________.

*Common­Size Statements

A very simple, but useful tool in financial analysis.

­Each income statement item is expressed as a percentage of sales. If you want to learn more check out paige selzer

­Each balance sheet item is expressed as a percentage of total assets.

­This helps greatly with trend analysis.

*DuPont Model

­ROE= (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Equity)    =Net Income 

Determined by three levers

(Net profit margin) x (Total Asset Turnover) x (Equity Multiplier)

    (Profitability)              (Efficiency)      (OPM)

*Problems with Financial Analysis

­Ratios uncover the possibility of a problem.

­Firms can use different accounting methods in their statements (LIFO vs FIFO) ­Firms don’t always use the same fiscal years.

­Accounting data can be temporarily manipulated (Window Dressing)

­Inflation can cause older assets to appear more efficient and profitable than newer assets.

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