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Fin 325 Final Review

Fin 325 Final Review. Chang Liu 04/30/2014. Intro to Finance. Business organizational forms Sole Proprietorship Partnership (General/Limited) Corporation LLC Major financial management decisions Capital budgeting Financing/Capital structure Working capital management

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Fin 325 Final Review

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  1. Fin 325 Final Review

    Chang Liu 04/30/2014
  2. Intro to Finance Business organizational forms Sole Proprietorship Partnership (General/Limited) Corporation LLC Major financial management decisions Capital budgeting Financing/Capital structure Working capital management Goal of financial management Maximize shareholder value/firm value Agency problem Financial Markets & Intermediaries
  3. Time Value of Money Components of interest rate Interest rate mathematics PV FV Compounding Equivalent n-period interest rate APR & EAR Solving for r Solving for n Rule of 72
  4. Annuities & Perpetuities PV of an annuity PV=CF*(1/r-1/(r(1+r)^n)) PV of a perpetuity PV=CF/r Two presumptions of PV formulas FV of an annuity Solving for CF of an annuity
  5. Real & Nominal Interest Rates How to measure inflation? Consumer Price Index (CPI) Real vs Nominal Fisher equation Real value of $1 PVreal vs PVnominal Matching CF with r Growing perpetuity PV=CF/(r-g)
  6. Bond & Bond Valuation Terminology Par value, coupon rate, maturity Different types of bond Coupon bond Zero coupon bond Level-payment bond Bond rating Bond pricing YTM Yield Curve/Term structure of interest rates Shape of yield curve Return on bond
  7. Stock & Stock Valuation Dividend models Constant dividends Growing dividends CF available to shareholders Equity = Firm Value - Debt Financial ratios P/E, P/Sales, M/B Return on stock
  8. Financial Statements Balance sheet Managing liquidity and capital structure BV vs MV Income statement Statement of cash flows Sources and uses of cash Statement of retained earnings Ratio analysis Liquidity/asset mgmt/debt mgmt/profitability/market value
  9. Net Present Value What does NPV measure? ΔFirm value How to calculate NPV? Incremental CFs What’s the decision rule? Positive  Accept NPV takes account of all future incremental CFs and is independent of financing.
  10. Capital Budgeting Incremental CF Pro forma financial statements OCF, NWC, CAPEX Depreciation tax shield Taxes from asset sale
  11. Issues with NPV Lifespan problem Common end-year Equivalent Annual Annuity (EAA) Real options Decision tree
  12. Alternatives to NPV Internal Rate of Return Decision rule Financing opportunity Equivalence of IRR & NPV Payback period Decision rule Limitations
  13. Risk & Return Higher risk -> higher (expected) return 2 types of risk Systematic -> Non-diversifiable Unsystematic/Idiosyncratic -> Diversifiable Measure of systematic risk Beta, CAPM Diversifying with a portfolio Portfolio expected return, standard deviation, beta
  14. Cost of Capital Beta approach Equity beta & asset beta Weighted Average Cost of Capital Cost of debt Cost of equity
  15. Capital Structure M&M Propositions I & II 3 assumptions The “pie” Interest Tax Shield Modified WACC Value of unleveraged and leveraged firm
  16. Market Efficiency Three forms of market efficiency Weak-form Semi-strong form Strong form
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