Study guide FINA3770 Fall 2017Instructor version all corporate

Study Guide (Tentative)

These are guidelines to help students to understand the key components of each chapter. They will also be the focus of your exam. However, the exam might cover more than the guidelines.

Topic I: Background

Chapter 1: Overview

  • What is finance?
  • Careers in finance
  • Business organization
  • Financial staff’s responsibility
  • Goals of the corporation

Chapter 3: Financial statements

  • Balance sheet and income statement
  • Preparing cash flow statement from balance sheet and income statement
  • Free Cash Flow (FCF)

Chapter 4: Analysis of financial statements

  • Five groups of ratios
  • Do Pont system and decomposition
  • $1M equity--$2M TA--$10M Sales—$2M NI
  • PM20%--ROA100%--ROE 200%

Find ROE? Given PM, TATO, EM/capital structure

Find PM/NI, TATO/A, Capital structure;

Topic II: Analytical tools in Finance

Chapter 5: Time value of money

  • Future value (ex. Saving)
  • How much money you will have in 10 years if you deposit $100 today, given interest 5%?
  • Present value (Saving)
  • How much do you need to deposit today if you want to accumulate $40,000 in 5 years, given interest 5%?
  • Annuity
  • PMT of an annuity (Car loan): N=60m I=5%/year PV=-20,000 FV=0 PMT=?
  • PV of an annuity
  • How much can I borrow? N=60m I=5% FV=0 PMT=-300 PV=?
  • ( find a real value of lottery) N=5 I=10% PMT=1M FV=0 PV=?
  • FV of an annuity (Saving a fix amount every year) N=5 I=10% PMT=1M PV=0 FV=?
  • Perpetuity (preferred stock)
  • Using calculator and tables:
  • Correctly input five variables ( N, I, PV, PMT, FV)
  • N is the number of payment periods
  • I is the interest rate per period
  • The amount and sign of PV, PMT, FV depend on the time, the amount of the cash flow and whether it is inflow or outflow
  • Solving for interest, maturity, payment, present value or future value. ( N, I, PV, PMT, FV)
  • Saving of a lump sum + annual saving ($2000 initial saving now, $100 every year, interest 5%, how much will you have in 10 years?)

N / I / PV / PMT / FV
PV lump sum
/ *3 / *10 / ? / 0 / @100
FV lump sum / *3 / *10 / @-100 / 0 / ?
N of lump sum / ? / *10 / *-(-100) / 0 / *+(133)
I of lump sum / *3 / ? / *-(-100) / 0 / *+(133)
PV annuity / *3 / *10 / ? / @100 / 0
FV annuity / *3 / *10 / 0 / @(-100) / ?
PMT of annuity(annual pay)
Monthly pay
Compared with annual pay / *3
360
30 / *10
10/12
10 / @1,000
250,000
250,000 / ?-402
?-2194
?-26520/y
-2210/m / 0
0
0
Combination of lump sum and annuity / *3 / *10 / @-(-1000) / @-(-100) / ?
Bond pricing(annual)
Semiannual

Quarterly

/ *3
3*2
3*4 / *10
10/2
10/4 / ? / *80
80/2
80/4 / *1000
1000
1000
  • Uneven cash flow
  • Amortization table: payment, interest paid, payment of principal, remaining balance

Chapter 8: Risk and return

  • Individual stock
  • Expected return:
  • Risk: standard deviation:
  • Coefficient of variation: CV =
  • Portfolio
  • Expected return of a portfolio
  • Risk of a portfolio
  • Risk and return relationship
  • Beta
  • Beta of a portfolio
  • CAPM :
  • solving for any variable in the equation

Topic III: Applications (Asset Valuation)

Chapter 7: Bonds

  • Key features of bonds
  • Bond valuation: a combination of annuity and lump sum
  • Coupon rate=9% PMT=90 N=10 I=10%, FV=1000 PV=?
  • For semiannual bond: PMT=45, N=20, I=5%, FV=1000 PV=?
  • Yield to maturity
  • Interest risk

Chapter 9: Stock valuation

  • Key features of stocks
  • Constant dividend growth model: P0 = D1/(rs-g)
  • Computing stock price. (P0 , Pn )
  • Dt= D0(1+g)t
  • P0 = D1/(rs-g)
  • Pn = Dn+1/(rs-g)
  • Pn = p0(1+g)n
  • Computing other variables.
  • Supernormal growth
  • valuing non-constant growth stocks (two stage model)
  • Preferred stock valuation

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