Fundamentals of Finance

1. Fundamentals of Finance FINAL EXAM REVIEW 12/10/2012

2. What to Study • Power Point Slides • Self test questions (all covered chapters) • All past quizzes • All homework problems • Review questions (all covered chapters) • Prior exams (my office, see office hours) • Study Guide (see slides 5 thru 17)

3. Review questions • Ch 1, p. 20 4, 5, 6, 10 • Ch 4, p. 83 1, 2, 3, 4, 7, 9, 10, 11 • Ch 5, p. 118 2, 3, 4, 7 • Ch 7, p. 186 1, 2, 3, 8, 9, 10 • Ch 8, p. 228 1, 3, 4, 5, 6, 8, 9 • Ch 9, p. 261 2, 3, 4, 7, 8 • Ch 10, p. 293 1, 5, 6, 7, 8, 12 • Ch 12, p. 369 1, 3, 5, 6, 7 • Ch 14, p.435 3, 5 • Ch 15, p. 459 2, 3, 4 • Ch 18, p. 526 1, 2, 3, 4

4. Self-Test problems • Ch 1, p.20 ST-4 • Ch 4, p.82 ST-1,2,4,5,8,10 • Ch 5, p.118 ST-2,3,6,7 • Ch 7, p.185 ST-1, 2, 3, 6, 7 • Ch 8, p.227 All • Ch 9, p.261 All • Ch 10, p. 293 St-1, 2, 3, 4 • Ch 12, p. 369 All • Ch 14, p. 434 ST 1,2,3,4,6 • Ch 15, p. 459 ST-2 • Ch 18, p. 525 ST-4

5. Formulas Ch 1, and 4 • Ch 1 - 10 Axioms • Goal of the firm • Fed Tax Calculation • Ch 4: Assets = Liabilities + Equity • Statement of Cash flow = Cash from operations +/- cash from investing +/- cash from financing

6. Formulas: Ch 5 Analysis of Financial Statements • Profitability Ratios: • Gross profit margin = Gross profit Sales • Operating profit margin = EBIT Sales • Net profit margin = Net Income Sales • Return on Assets = Net Income Total Assets • Return on Equity = Net Income Shareholder Equity

7. Formulas: Ch 5 Analysis of Financial Statements • Liquidity ratios: • Current ratio = Current Assets Current Liabilities • Quick ratio = Current assets – inventory Current Liabilities • Debt Ratios: • Debt to Total Assets = Total Debt Total Assets • Times Interest Earned = EBIT Interest expense

8. Formulas: Ch 5 Analysis of Financial Statements • Assets Activity Ratios: • Ave. Collection Period = Accounts Rec. Ave. daily credit sales • Inventory turnover = Cost of Goods Sold Inventory • Total Asset turnover = Sales Total Assets

9. Formulas Ch 5 Analysis of Financial Statements • Market Value Ratios: • Earnings per share = Net Income Shares Outstanding • Price/Earning ratio = Market price per share Earnings per share

10. Formulas – Chapter 7 • Expected value/Mean = u = E(VxP) • Standard Deviation = square root of sum of P(V-u)2 • Coefficient of variation (Standard Deviation / Mean) • CAPM = K = Krf + B(Km – Krf)

11. Formulas – Ch 8, TVM • FV = n, i/y, pv, pmt=0, • PV = n, i/y, pmt=0, fv • FVa = n, i/y, pv=0, pmt • PVa = n, i/y, pmt, fv=0 • FVad = n, i/y, pv=0, pmt, (1 + k) • PVad = n, i/y, pmt, fv=0, (1 + k) • PVp = Div/K

12. Formulas – Ch 9, Cost of Capital • ATKd = Kd(1 – T) • Kps = Div/Net Price • Kre = (D1/Price) + g (growth rate) D1 = Do x (1 + g) • Kcs(new) = D1/(Price – Float.) + g • WACC = WTd x ATKd + WTp x Kps + WTcs x Kcs • Breakpoint = Available debt or equity before cost of capital increases / Percent of debt or equity to total capital

13. Ch 10 Formulas – Capital Budgeting • NPV: CFo = -Initial Investment CF1..CFn = After Tax cash flows F1.. = frequency I = Required Rate of Return NPV = Compute • IRR = Same as above for CFo and CF 1..n IRR = compute • Payback = Years it takes to recover the Initial Investment

14. Ch 12 Formulas – Bus Valuation • Bond Value (PV): N = years to maturity; I/Y = Required Rate of Return; PMT = Interest; FV = par value = $1,000; Compute PV • YTMb (K) = Above formula solving for I/Y; PV = -market price of bond • Preferred stock value = Div/K • YTMps (K) = Div/Price • Com. Stock value (Price) = D1/(k – g) • YTMcs (K) = (D1/Price) + g

15. Ch 14 – Bonds & Preferred Stock • Bond basics • Indenture agreement • Special features of bonds • Bond valuation calculation • See formula in Ch 12 • Preferred Stock features • Preferred stock valuation calculation • See formula in Ch 12

16. Ch 15 – Common Stock • Stock characteristics • Pros & cons of equity financing • Common stock valuation • See formula in Ch 12 • Issuing and pricing • Stock rights and warrants • Stock options

17. Ch 18 – Managing Cash • Desired min/max cash balance • Developing a monthly cash budget • Compute cash inflows • Compute cash outflows • Determine cash surplus/deficit • Using beginning cash balance, and minimum cash balance, determine amounts to be borrowed/paid back • See table 18-7 for complete cash budget

18. What to Bring • Scantron #882 – E • Number 2 pencil (no pens) • Financial Calculator (no cell phones) • The formula pages I gave you (you must bring this!) Note: If you need the math formulas, write them on the formula page.

19. I will provide • Space on the exam for your calculations (no scratch paper allowed) • Seating chart – seats will be reassigned for the final

20. Logistics/Format • Multiple choice – 40; 1.5 points each Answer on front of scantron • Problems – Do 7 of 8; worth 6 pts ea Answer on exam Show your work • Multiple choice will include many calculations

21. Special Office Hours • Tue 12/11 9:30 – 12:00 • Thur 12/13 1:00 – 3:00 • Mon 12/17 9:30 – 11:30 • Final Exam: Monday, Dec 17th, 12:15 to 2:30, BBC 326

22. Comments • Prior exam review – do not copy questions, focus on concepts • My office only, do not leave with exam or you will fail the course • Budget your time on the exam • Show your work; it could make a difference • Final grades will be emailed to you by Friday, Dec 21st.