Week1 Study Guide: Foundations of Finance

Study Guide
FIN/571 Version 6 / 1

Week1 Study Guide: Foundations of Finance

Readings andKey Terms

Ch. 1of Fundamentals of Corporate Finance

Wealth
Stakeholders
Residual cash flows
Bankruptcy
Capital structure
Capital markets
Net working capital (NWC)
Sole proprietorship
Partnership
Limited liability partnership (LLP)
Limited liability company (LLC)
Corporation
Prviately held corporations
Agency conflicts
Agency costs

Ch. 2

Financial and real assets
Primary and secondary markets
Marketability
Liquidity
Private and public markets
Market efficiency
Financial intermediation
Initial public offering (IPO)
Real and nominal interest

Ch. 3

Generally Accepted Accounting Principles (GAAP)
Book value
Balance sheet
Income statement
Statement of cash flows
Depreciation
Treasury stock
Market value
Cash flows to investors
Average and marginal tax rate

Content Overview

Key financial decisions

Key finance axioms

Identify and define various axioms of finance, such as agency, financial intermediation, stakeholders, IPO, liquidity,and so on.
Determine difference between nominal and real interest rates.
Determine difference between private and public markets.
Determine difference between financial and real assets.
Understand financial intermediation.

Financial statements

Identify the components of a balance sheet.
Explain the balance sheet identity and why it must balance.
Describe how market values differ from book values.
Identify the components of an income statement.
Identify the basic income statement equation and the information it provides.
Understand the calculation of cash flows from operating, investing, and financing activities required in the statement of cash flows.
Understand the difference between marginal and average tax rates.
Understand how each of the financial statements articulates with the other.

Fundamental decisions in financial management

Understand the concerns of capital budgeting, financing, and working capital decisions and how they affect the balance sheet.

Organizational structures and forms

Identify forms of business organization and their respective strengths and weaknesses.
Determine types of business forms needed for specific business applications.

Business goals

Wealth maximization

Identify agency conflicts.
Know the concept of wealth maximization
Understand the difference between profit and stock valuation.
Identify themajor factors that affect stock prices.

Week 2 Study Guide: Financial Statement Analysis

Readings and Key Terms

Ch. 4 of Fundamentals of Corporate Finance

Financial statement analysis
Trend analysis
Benchmark
Common-size financial statements
Financial ratio
Insolvency
Financial leverage
Default risk
Standard Industrial Classification (SIC) System
North American Industry Classification System (NAICS)

Ch. 18

Replacement cost
Book value
Enterprise value
Nonoperating assets (NOA)
Terminal value
Cash flow
Free cash flows
Break-even
Dividend discount model (DDM)

Content Overview

Financial ratios

Understand components of financial ratios.

Calculate key ratio equations

Liquidity

Current ratio
Quick ratio
Cash ratio

Efficiency

Inventory turnover
Day’s sales in inventory
Accounts receivable turnover
Day’s sales outstanding
Total asset turnover
Fixed asset turnover

Leverage

Total debt ratio
Debt-to-equity ratio
Equity multiplier
Times interest earned
Cash coverage

Profitability

Gross profit margin
Operating profit margin
Net profit margin
EBIT return on assets
Return on assets (ROA)
Return on equity (ROE)

Market value indicator

Earnings per share
Price-earnings ratio

DuPont equation

ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
ROE = (Net Income / Net Sales) x (Net Sales / Total Assets) x (Total Assets / Total Equity)

Interpret financial ratio results

Interpret financial ratio results against historical company data.
Interpret financial ratio results against industry benchmarks.

Business valuation

Explain why the choice of organizational form is important.
Describe why cash flow and break-even are important in business.

Week 3 Study Guide: Working Capital Management

Readings and Key Terms

Ch. 14 of Fundamentals of Corporate Finance

Trade credit
Consumer credit
Cash conversion cycle
Operating cycle
Carrying costs
Economic order quantity
Compensating balances
Float
Lockbox
Working capital
Maturity matching strategy
Short- and long-term financing
Credit lines
Commercial paper

Ch. 15

Bootstrapping
Venture capitalists
Angel investors
Seasonal issue
Prospectus
Underwriting
Cash offer
Shelf registration
Public placement
Private placement

Ch. 16

Optimal capital structure

Firm value
Financial restructuring
Business and financial risk
Costs of debt
Asset substitution problem

Ch. 17

Payoutpolicy
Dividends
Declaration date
Ex-dividend date
Record date
Payable date
Stock repurchase
Stock dividends
Tender offer
Stock split

Ch. 19

Financial and strategic planning
Pro forma financial statements
Percent of sales method
External funding needed (EFN)
Payout and plowback ratios
Internal and sustainable growth rate

Content Overview

Working capital management

Concepts of working capital

Understand working capital terms.
Know what trade and consumer credit is.

Cash conversion cycle

Identify various components of the cash conversion cycle.
Know how to calculate the cash conversion cycle.

Working capital management strategies

Understand carrying costs.

Cash management and budgeting

Understand the terms of sale.
Calculate and interpret the cost of trade credit.
Calculate and interpret economic order quantity.
Identify reasons for holding cash.
Understand the concept of float.
Identify methods of float (lockboxes, EFTs, and so on).

Financing working capital

Understand differences in short- and long-term financing strategies.
Identify various forms of short-. and long-term financing.

Raising capital

Identify and differentiate between the various methods of raising capital.
Differentiate between the advantages and disadvantages of going public.
Understand the process of a company going public.
Differentiate between private and public markets.

Capital structure policy

Capital structure and firm value

Determine a company’s optimal capital structure.
Identify the relation between business, financial, and total equity risk.

Benefits and costs of using debt

Identify the benefits of financing a company with debt.
Identify the costs of financing a company with debt.
Understand how taxes influence capital structure.
Determine optimal capital structure of a company.

Dividends, stock repurchases, and payout policy

Types of dividends

Identify various types of dividends.
Understand the dividend payment process.

Stock repurchases and dividends

Identify how stock repurchases differ from dividends.
Understand concept of dividends and firm value.
Understand differences between stock dividends and stock splits.

Financial planning and forecasting

Finance and strategic planning

Differentiate among strategic, investment, financing, and divisional plans.
Identify various financial planning models.
Understand why sustainable growth is important.
Create a pro forma balance sheet.
Create a pro forma income statement.

Week 4 Study Guide: Business Valuation

Readings and Key Terms

Ch. 5 of Fundamentals of Corporate Finance

Time value of money
Time zero
Future value (fv)
Principal
Simple interest
Compounding
Compound interest
Discounting
Discount rate
Present value (pv)
Rule of 72

Ch. 6

Annuity
Perpetuity
Ordinary annuity
Present value of an annuity (PVA)
Amortization
Future value of an annuity (FVA)
Annuity due
Annual percentage rate (APR)

Ch. 7

Total holding period return
Expected return
Variance (σ2)
Standard deviation (σ)
Normal distribution
Portfolio
Diversification
Coefficient of variation (CV)
Covariance
Diversifiable and nondiversifiable risk
Market portfolio
Market risk
Beta (β)
Capital asset pricing model (CAPM)
Security market line (SML)

Ch. 8

Coupon payments
Face value or par value
Coupon rate
Opportunity cost
Par value bonds
Discount bonds
Premium bonds
Yield to maturity
Effective annual rate (EAY)
Realized yield
Interest rate risk
Yield curve

Ch. 9

Bid price
Offer (ask) price
Dividend yield
Common stock
Preferred stock

Content Overview

Time value of money

Single sums

Calculate present value.
Calculate periods.
Calculate interest and discount rate.
Calculate future value.
Interpret and make decisions from the calculations.
Understand the relationship between time, rate, and value.

Annuities

Identify various forms of annuities.
Calculate present value.
Calculate periods.
Calculate interest and discount rate.
Calculate payments.
Calculate future value.
Interpret and make decisions from the calculations.
Identify and understand perpetuities.

Costs of loans

Calculate effective annual rate.
Compare interest rates on different loans.

Risk and return

Calculate the return of an investment.
Determine expected rate of return.

Measuring risk

Calculate variance and standard deviation.
Interpret variance and standard deviation.
Understand risk diversification.

Capital asset pricing model (CAPM)

Calculate expected return using capital asset pricing model.
Identify and interpret the security market line.
Choose between two investments using CAPM.

Bond valuation

Wealth maximization

Identify types of bonds.
Calculate value of a bond.
Identify difference between par, discount, and premium bonds.
Calculate yield to maturity (YTM).
Compare bonds using effective annual rate.
Understand correlation between interest rate risk and bonds.

Stock valuation

Markets

Differentiate between primary and secondary markets.
Differentiate between common and preferred stock.

Valuation

Calculate value of common stock.
Calculate value of preferred stock.
Calculate yield of common and preferred stock.
Understand growth rates and how they affect dividend payments and stock valuation.

Week 5 Study Guide: Capital Financing and Risk Analysis

Readings and Key Terms

Ch. 7of Fundamentals of Corporate Finance

Total holding period return
Expected return
Variance (σ2)
Standard deviation (σ)
Normal distribution
Portfolio
Diversification
Coefficient of variation (CV)
Covariance
Diversifiable and nondiversifiable risk
Market portfolio
Market risk
Beta (β)
Capital asset pricing model (CAPM)
Security market line (SML)

Ch. 10

Capital budgeting
Independent versus mutually exclusive projects
Contingent projects
Opportunity cost of capital
Capital rationing
Net present value (NPV)
Payback period
Discount payback period
Accounting rate of return
Internal rate of return
Modified internal rate of return
Conventional cash flow

Ch. 11

Incremental cash flows
Marginal tax rate
Stand alone principle
Net operating profits after tax (NOPAT)
Tangible assets
Intangible assets
Current assets
Nominal dollars
Real dollars
Variable costs
Fixed costs
Equivalent annual cost (EAC)

Ch. 12

Operating leverage
Degree of operating leverage (DOL)
Break-even analysis
Pretax operating cash flow (EBITDA) break-even point
Per-unit contributions
Crossover level of unit sales (CO)
Accounting operating profit (EBIT) break-even point
Sensitivity analysis
Scenario analysis
Simulation analysis
Profitability index

Ch. 13

Finance balance sheet
Weighted average cost of capital (WACC)

Ch. 20

Financial option
Call option
Put option
Real option
Exercise
Call premium
Put premium
Arbitrage

Content Overview

Capital budgeting fundamentals

Capital budgeting process

Identify reasons to make capital expenditures.
Understand capital budgeting terms.
Know how to classify capital investment project.
Differentiate the differencesamong independent, mutually exclusive, and contingent projects.
Identify reasons to make capital expenditures.
Understand difference between nominal and real dollars.
Use adjusted rate of return from CAPM to evaluate projects NPV.
Determine project profitability.
Choose between two or more projects.

Capital budgeting calculations

Calculate annual cash flows (ACF).
Calculate terminal cash flows (TCF).
Calculate marginal and average tax rates.
Calculate cost of debt.
Calculate cost of equity.
Calculate cost of preferred stock.
Calculate cost of common stock.
Calculate cost of capital (WACC).
Calculate net present value (NPV).
Calculate payback period.
Calculate discounted payback period.
Calculate internal rate of return (IRR).
Calculate modified internal rate of return (MIRR).
Calculate profitability index (PI).
Calculate capital asset pricing model (CAPM).
Calculate operating leverage (DOL).
Calculate accounting operating leverage (ADOL).
Calculate break-even analysis cash flows (ACF).

Cash flows and capital budgeting

Identify forms of business organization and their respective strengths and weaknesses.
Determine types of business forms needed for specific business applications.

Evaluating project economics and capital rationing

Variable and fixed costs and project risk

Identify various costs and changes in EBIT.

The cost of capital

Cost of capital calculations

Calculate cost of debt.
Calculate cost of equity.
Calculate cost of preferred stock.
Calculate cost of common stock.

Working capital management

Working capital accounts

Understand operating and cash conversion cycles.
Identify reasons for holding cash.
Identify discretionary financing needs (both short- and long-term).

Working capital calculations

Calculate operating and cash conversion cycles.
Calculate cost of trade credit.
Calculate economic order quantity.
Calculate effective annual rate (EAR).

Options and capital management

Financial options

Understand the concept of options.
Identify differences between call and put options.
Understand the concept of arbitrage.
Identify uses of hedging.

Week 6 Study Guide: Applications of Finance

Readings and Key Terms

Ch. 19of Fundamentals of Corporate Finance

Financial and strategic planning
Pro forma financial statements
Percent of sales method
External funding needed (EFN)
Payout and plowback ratios
Internal and sustainable growth rate

Ch. 21

Globalization
Multinational corporation
Transnational corporation
Country risk
Exchange rate
Spot rate
Forward rate
Exchange rate risk
Hedge
London Interbank Offer Rate (LIBOR)

Content Overview

International financial management

Concepts

Identify and define various axioms of international finance, such as globalization, multi-national companies, foreign exchange, spot rate, forward rate, LIBOR, and so on.
Calculate cross rates.
Calculate forward premium (Discount).
High-level understanding of exchange rate risk.

Note.Ch. 19 content is also referred to in this week. Be sure to review the Week 3 Study Guide to reference Ch. 19 content.