Principles of Business Finance
Principles of Business Finance FIN 3014
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This 7 page Class Notes was uploaded by Miss Candida Hoppe on Thursday October 29, 2015. The Class Notes belongs to FIN 3014 at University of Texas at San Antonio taught by Paula Varson in Fall. Since its upload, it has received 54 views. For similar materials see /class/231325/fin-3014-university-of-texas-at-san-antonio in Finance at University of Texas at San Antonio.
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FIN 3014 Principles of Business Finance Sections 001 006 014017 Fall 2010 Preliminary Study Guide for Exam 1 Exam 1 will consist of 20 questions 5 points each Be sure you know the de nitions of any terms in italics N 5 owewww 9 0 Chapter 1 3 verbal What is the primary goal of the firm Why is maximization of shareholder wealth as a goal superior to pro t maximization Who are the true owners of the rm Be familiar with the ve basic principles of nance especially the following a In nance what determines value b Time Value of M oney and how timing affects the value of the incremental aftertax cash ows and investor decisions c The principle of riskreturn traaleo and how RiskAversion affects investors decisions Be able to recognize the more risky of two sets of cash flows d What are the characteristics of e icient markets What force drives price toward value e What causes agency problems and how can they be reduced Why is ethical behavior essential in business What are the advantages and disadvantages of the corporate form of business organization compared to other forms such as sole proprietorship general partnerships and limited partnerships Chapter 3 2 verbal 2 numerical You should understand the purpose of each of the three major nancial statements the balance sheet the income statement and the statement of cash ows You should be able to assign a nancial account to the appropriate section of the appropriate nancial statement You should be able to de ne accrual accounting and explain how it affects the rm s financial statements De ne the Cash Flow Identity statement and explain how it differs from Statement of Cash Flows Complete a commonsized income statement and identify the rm s gross profit margin operating pro t margin and net pro t margin Complete a commonsized balance sheet Compute the rm s networking capital and debt ratio Know how a particular income statement account or the change in a particular balance sheet account affects the rm s cash ows Be able to classify each cash ow as an operating cash flow an investment cash flow or a financing cash Prepare a rm s statement of cash ows by computing the firm s cash ow from Operating Activities cash ow from Activities cash ow from Financing Activities and Total Increase or Decrease in Cash FIN 3014 Principles of Business Finance Sections 01 through 06 and 14 through 17 Fall 2010 Study Guide for Exam 2 Chapter 6 13 verbal and 4 numerical 9 4 9quot gt OOO l De ne and calculate a holding period dollar gain and holding period return Know the alternate names for the holding period return De ne and be able to calculate an investment s capital gains yield and current yield De ne and calculate the expected cash flow and expected rate of return of an individual investment De ne and calculate the risk standard deviation of an individual investment What is the rule of thumb for the probability distribution of returns Calculate the average return and variability standard deviation of historical data Compare the historical relationship between variability and average rates of return in the capital markets Explain how historical variability and average returns relate to risk and expected returns What is a portfolio What are the two types or risk Which type can be reduced though diversification What is the relationship between the expected or average return on a portfolio and the returns on the assets within the portfolio What is the relationship between the risk or variability of the return on a portfolio and the risk or variability of the returns on the assets within the portfolio What is the main motivation for holding multiple assets To attain diversi cation bene ts how should we select assets for a portfolio What property should we look for How many assets do we need Recognize and de ne the characteristic line What is on the horizontal axis and what is on the vertical axis How is beta related to the characteristic line What type of risk does beta measure What type of risk does standard deviation measure Why is the type of risk measured by beta is the only important type of risk What two statistics does an asset s beta depend on What does it mean when an asset has a beta of 00 10 greater than 10 between 00 and 10 or less than zero What is the normal range for stock betas What three factors can distort beta estimates Given the betas of the individual assets calculate the portfolio beta De ne AssetAllocation and explain whyAssetAllocation decisions are considered the most important decision while managing an investment portfolio De ne an investor s required return risk free rate and risk premium How is the riskfree rate typically measured What information does the CAPM provide According to CAPM an asset s risk adjusted required return depends upon which type of risk Use CAPM to calculate riskadjusted required returns FIN 3014 Principles of Business Finance Fall 2010 Study Guide for Comprehensive Final 40 questions 5 points each As stated in the syllabus you MUST take the exam with your own section Sections 001 7 006 MW 200 class Friday December 10 730 7 1000 am Sections 014 7 015 TR 930 class Monday December 13 1030 7100 Sections 016 7 017 TR 200 class Thursday December 9 1030 7 100 Unit I Chapters 1 3 4 5 5 numerical 3 verbal 1 Know what information is provided by each of the rm s nancial statements 2 De ne and calculate net working capital Equation NOT supplied 3 Find information on nancial statement to calculate basic accounting ratios Equations NOT supplied such as dividend payout ratio earning per share priceeamings ratio current ratio quick AKA acid test ratio cash ratio net pro t margin total asset turnover aka asset utilization ratio debt ratio and return on equity Comment The last seven ratios are used in your lab project 4 Know how a speci ed transaction e g the rm writes a check to pay accounts receivable would affect one of these ratios 5 Know what a speci ed ratio measures ie liquidity effective use of assets leverage return to shareholders creation of shareholder value 6 Use the DuPont Equation to explain differences in Return on Equity See lab project 7 Single sums solved for FV PV interest rates or time with xed interest rates 8 FV or PV of a single sum with varying interest ratesMust be done equation method 9 PV of annuity problems solved for PV N interest rate or payment 10 FV of annuity problems solved for FV N interest rate or payment 11 PV of perpetuity problems solved for PV interest rate or payment 12 Given a quoted or nominal annual rate ie the APR annual percentage rate and the number of compoundings per year calculate the APY annual percentage yield AKA the EAR e ectz39ve annual rate Unit 11 Chapters 6 7 8 4 Numerical 2 Verbal N E 4 V39 gt19 Given the purchase price the sales price and the income such as dividends or coupons calculate the holding period return for an investment Calculate the value and yieldtomaturity of zerocoupon bonds bonds with annual coupon payments and bonds with semiannual coupon payments Calculate the value of a share of common stock with known selling price and dividends Equation not provided Use the constant dividend growth model DDM to calculate the value of a share of common stock and the value of a share of preferred stock Use the constant dividend growth model DDM to calculate the expected return on a share of common stock and expected return on a share of preferred stock Use CAPM to estimate a stock s risk adjusted required return Under what circumstances is price equal to value AND expected return equal to risk adjusted required return How does a welldiversi ed investor use the relationship between price and value or the relationship between expected return and riskadjusted required return in stock selection Know how an investor who is NOT well diversi ed should choose between two investments based on the investments expected returns and standard deviations Unit 111 Chapters 9 10 11 12 15 26 questions Chapter 9 7 Cost of Capital 3 numerical and 2 verbal 1 What is capital What are the three main sources of capital for a rm What is Cost of Capital What are two other names for Cost of C apital What are two reasons that a lm s cost of capital may differ from the investors required return on the same nancial asset 9 4 Calculate a rm s aftertax cost of debt nancing with and without oatation costs 5 Calculate a rm s cost for preferred stock nancing with and without oatation costs 6 Calculate a rm s cost of retained earnings as equity nancing using both the dividend growth model DDM and the CAPM 7 Calculate a rm s cost of external equity nancing with oatation costs using the dividend grth model DDM 8 Calculate a rm s weighted average cost of capital WACC 9 Why should the rm s target capital structure be used when calculating its WACC When a rm s target capital structure is not known what substitutes can be used in the WACC calculation 10 What does the limited amount of retained ea1nings imply about the rm s dividend policy 11 Under what circumstances can a rm s WACC be used as the discount rate in evaluating a project Under what circumstances should the discount rate be higher lower than the WACC Comment Chapter 9 applies the skills in calculating a bond s YTM from chapter 7 in using CAPM to calculate the riskadjusted required return on a stock from chapter 6 and in using the Constant Growth Model to calculate the total return on stock from chapter 8 Chapter 10 7 Capital Budgeting Techniques 4 numerical and 2 verbal De ne capital budgeting What are some ways a rm can nd ideas for pro table new projects Why is this dif cult For each of the project evaluations that we studied Payback period NPV PI and IRR know the following 7 How to make the required calculations 7 How to make the accept reject decision and the ranking decisions 7 The strengths and weaknesses of the method 7 Which of the four methods is best and why What kinds of problems can unusual cash ow cause with IR What is capital rationing Why does it happen How do select projects when funds are limited ND i E 9399 6 Know the difference between mutually exclusive and independen projects 7 In ranking what are the three circumstances that that can cause discrepancies between NPV PI and IRR What biases do PI and IRR have 8 Be able to calculate a project s equivalent annual annuity and use it to choose between mutuallyexclusive repeatable projects with unequal lives No equation provided According to Harold Beirman what is the relative popularity of Payback period NPV PI and IR among manager 50 Chapter 11 7 Capital Budgeting Cash Flows 3 numerical and 3 verbal 1 Know which cash ows to include and which to exclude when evaluating a project In particular be able to recognize an incremental aftertax cash ow a sunk cost an opportunity cost an investment in working capital a synergistic effect cannibalization a nancing cash ow Know the appropriate treatment of each in estimating a proj ect s cash ows gt1 9 V39 4 E N 9 i O O Calculate an investment in net working capital Equation not provided How does an investment in net working capital affect a project s initial outlay and non operating terminal cash ows Calculate how an initial investment in NWC that is recovered at the end of the project affects a project s NPV and IRR Identify the cash ows that are included in the basis for depreciation Calculate the basis for depreciation and the annual depreciation on a straightline basis Calculate a project s initial outlay investment costs including aftertax effects of sale of old assets and investment in net working capital Recognize costs that must be excluded from these initial cash ows Calculate a project s annual incremental aftertax cash ows from operations incremental free cash ows How does a change in depreciation expense affect these cash ows What two types of cash ows typically occur in the last year of a project Calculate a project s nonoperating terminal cash ow including aftertax proceeds from the sale of assets and recovery of net working capital Be able to calculate the complete cash ows and NPV IRR for a simple project Recognize descriptions of some common types of options found in capital projects Know how to incorporate risk when evaluating a project using NPV or IRR Know the three perspectives on risk Under what circumstances is project stand alone risk the appropriate measure of risk Under what circumstances is contributiontofirm risk the appropriate measure of risk Under what circumstances is the project s systematic risk the most appropriate measure of risk Which measures of risk do we use for a publicly traded firm Recognize explanations of the five techniques for assessing risk Accounting Beta Pure Play Method Simulation Scenario Analysis Sensitivity Analysis Chapter 12 7 Capital Structure 3 verbal N E 4 V39 9 Define and be able to recognize examples of business risk operating risk and nancial risk and explain how each contributes to the total risk of the firm s equity Distinguish between a firm s financial structure and its capital structures What sources of funds are included in a firm s capital structure What sources of funds are part of the financial structure but not part of the capital structure Define optimal capital structure How does the optimal capital structure relate to the firm s WACC and the total market value of the securities that the firm issues What two basic assumptions lead to Modigiliani and Miller s conclusion that capital structure is irrelevant What happens to a firm s cost of capital as debt increases if debt is tax deductible What happens to a firm s cost of capital as debt increases if high levels of debt reduce the firm s operating cash ows How can high levels of debt reduce operating cash ows Describe the moderate position on Capital Structure Theory 9 10 ll 12 How does business risk and operating risk affect a firm s optimal capital structure Why do rms in the same industry tend to have similar capital structures How does a poor economy affect a firm s optimal capital structure How does an increase in corporate income taxes affect a firm s optimal capital structure Use an EBITEPS chart and nancial ratios to evaluate a capital structure decision Be able to recognize the 10 factors that affect the decision to issue debt Which two are most important Which two are least important Chapter 15 7 Working Capital Management 3 numerical and 3 verbal K N 5 V39 0 gt1 9 0 O N Recognize the balance sheet accounts that are included in current assets net working capital working capital spontaneous sources financing temporary sources of nancing permanent sources of financing What is the riskretum tradeoff in managing a firm s working capital How does an increase or decrease in liquidity affect a firm s profitability and ROE Recognize actions that would increase or decrease a firm s liquidity What are the advantages and disadvantage of financing with shortterm debt and other current liabilities versus longterm sources of financing What does the hedging principle of working capital management proscribe for the use of shortterm debt and longterm capital Distinguish between permanent current assets and temporary current assets and distinguish between temporary current liabilities and spontaneous current liabilities What are the three basic factors that in uence the specific source of shortterm financing that a firm should use What factors determine the interest rates that a firm will pay on shortterm loans Define prime rate Describe and compute a firm s cash conversion cycle How can management shorten a firm s CCC What does a negative CCC imply Calculate the APR annual percentage rate and APY annual percentage yield AKA EAR e ective annual rate for a shortterm loan Be familiar with the sources of shortterm financing available to the firm Recognize which sources of shortterm financing are secured and which are not secured Define trade credit Know the advantages and disadvantages of using trade credit Know which days you would pay your supplier if you use trade credit How many days credit do you get if you forgo the discount Calculate the effective cost of forgoing the discount offered on trade credit Define compensating balance and discounted interest Compute the amount you must borrow if the loan requires a compensating balance andor discounted interest Compute the APR for loans with compensating balances andor discounted interest Define commercial paper and floatation costs Know the advantages and disadvantages of using commercial paper Calculate the effective cost of financing with commercial paper with oatation costs and discounted interest
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