Study Guide – Final Exam Managerial Finance – Spring 2012
Chapters 1 4 (5%)
* Know goal of the financial manager
* Define agency problem
* Describe the four areas of Ratio Analysis (liquidity, activity, solvency, and profitability) and their purpose, know information that gives ratios value and meaning.
Chapter 5 (15%)
* Time Value of Money: PV, PMT of loan, FV of annuity, growth rate and mixed stream of cash flows
Chapter 68 (46%)
* Expected return, Standard deviation and Coefficient of variation of a single asset (Prob 85 but also find Standard deviation and CV, or prob.811, with only 2 assets and 2 scenarios.) * Portfolio return and SD ( ST81, prob. 813)
* Know the definition and meaning to CAPM, including beta, market risk premium and asset risk premium * Understand beta’s effect on risk, return and share price * Know the definition of diversifiable and nondiversifiable risk and examples of each * Know definition and equation for Real, risk free and nominal rate of interest * Calculation the price and YTM of bonds (prob 617 and Prob 621), both with annual and semiannual rates of return * Understand why the required returns of bonds change and be able to explain the relationship between the required return, the coupon rate, the par value and the price of the bond. * Know the difference between a premium bond, discount bond and par bond. * Calculation the price of stock – using no growth, constant growth, and variable growth * Financial Decisions based on Stock Value – study last few pages of chapter where this and reviewed and Prob. 719.
Chapter 14 & 15 (34%)
* Define Net Working Capital and understand the risk/profit issue of managing short term financing. (Study Chart on pg. 640 table 14.1) * Seasonal/permanent financing problem with aggressive/conservative strategy– similar to 144 * Define 3 levels of current liabilities: Spontaneous Financing, unsecured and secured *...
...FI515 – ManagerialFinance
Below I have listed some areas for you to review in preparation for the quiz this week.
1. Objective multiple choice question related to advantages and disadvantages of the various forms of organization. Review Chapter 1, pp. 58. (TCO A)
Review the advantages and disadvantages of the three primary forms of business organization: sole proprietorship, partnership and corporation (liability, tax advantages, etc.) The threaded discussion from Week 1 will also serve as a review for this material.
2. Objective multiple choice question related to the Security Market Line (SML) and risk aversion. Review Chapter 6, pp. 246253. (TCO C)
The slope of the SML is determined by investors’ aversion to risk. The greater the average investor’s risk aversion, the steeper the SML. The threaded discussion from Week 3 should also serve as a review for this material.
3. Problem multiple choice question related to calculations studied in Chapter 5. You will have one of 4 test bank questions covering either real risk free rate, inflation premium, default risk premium, and liquidity premium. Review Chapter 5: real risk free rate, pp. 192193. inflation premium, p. 193194; default risk premium, pp. 195200; liquidity premium, p. 201. (TCO C)
Review homework assignments as well as threaded discussion problems from Week 3.
4. Problem multiple choice question related to bond value calculations studied in chapter...
...This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project?
A. $68,211.04
B. $68,879.97
C. $69,361.08
D. $74,208.18
E. $76,011.23
72. Panelli's is analyzing a project with an initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debtequity ratio of 0.45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project?
A. $15,411
B. $15,809
C. $16,333
D. $16,938
E. $17,840
73. Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent. Management is considering a project that will produce a cash inflow of $36,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?
A. $299,032
B. $382,979
C. $411,406
D. $434,086
E. $441,414
74. The Bakery is considering a new project it considers to be a little riskier...
...ShortTerm Solvency Ratio: A) Current Ratio = Current Assets / Current Liabilities, B) Quick Ratio = (Current Assets – Inventory) / Current Liabilities, C) Cash Ratio = Cash / Current Liabilities
Asset Utilization Ratios: A) Turnover = Sales / Total Assets, B) Inventory Turnover = Cost of Goods Sold / Inventory, C) Receivables Turnover = Sales / Accounts Receivables
Longterm Solvency Ratio: A) Total Debt Ratio = Total Debt (Current Liabilities + Long term Liabilities) / Total Assets, B) DebtEquity Ratio = Total Debt / Total Equity, C) Equity Multiplier = Total Assets / Total Equity, D) Times Interest Earned = EBIT (Earnings Before Interest & Tax) / Interest Expense, E) Cash Coverage Ratio = (EBIT + Depreciation) / Interest Expense
Profitability Ratios: A) Profit Margin = Net Income / Sales, B) Return on Assets (ROA) = Net Income / Total Assets, C) Return on Equity (ROE) = Net Income / Equity
Others: Days Sales in Inventory = 365 / Inventory Turnover (COGS / Inventory), Debt Ratio = Total Debt / Total Assets,
DuPont Identity: ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
Balance Sheet: Assets, Liabilities, Inventory, Accounts Receivables, Equity
Income Statement: Sales, Cost of Goods Sold, Depreciation, EBIT, Interest Paid, Net Income, Dividends
CHP1&2 The form of business subject to the highest taxation to itself and owners is a: CCorp\ Which form of business issues shares to its owners, limits the number of shareholders, but avoid...
...9.1 How is a project classification scheme (for example, replacement, expansion into new markets, and so forth) used in the capital budgeting process?
Project classification schemes can be used to indicate how much of an analysis is required to evaluate a given project, and the level of the executive who much approve the project, and the cost of capital that should be used to calculate the project’s NPV. By doing so, classification schemes can increase the efficiency of the capital budgeting process.
9.4 Explain the decision rules—that is, under what conditions a project is acceptable—for each of the following capital budgeting methods: a. Net present value (NPV) b. Internal rate of return (IRR) c. Modified internal rate of return (MIRR) d. Traditional payback (PB) e. Discounted payback (DPB)
a. Should only be undertaken if NPV is greater than 0. b. Should only be undertaken if IRR is greater than the cost of capital. c. The MIRR will yield the same as the IRR method, so it would need to be greater than the cost of the capital. d. Should only be undertaken if PB is less than the arbitrary number of years. e. Should be undertaken if it has the shortest payback period, and can be used to identify the project that will generate more cash for investment quickly.
9.6 In what sense is a reinvestment rate assumption embodied in the NPV and IRR methods? What is the assumed reinvestment rate of each method?
The NPV and IRR methods both involve compound interest, and the math...
...FinanceStudyGuide
These provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds.
primary markets
In the U.S., these financial institutions arrange most primary market transactions for businesses.
investment banks
Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these?
secondary markets
These feature debt securities or instruments with maturities of one year or less.
money markets
Which of the following is NOT a money market instrument?
Treasury bills
Commercial paper
Corporate bonds
Banker's acceptances
Which of the following is NOT a capital market instrument?
U.S. Treasury notes and bonds
U.S. Treasury bills
U.S. government agency bonds
Corporate stocks and bonds
This is a security formalizing an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future.
Derivative Security
This is the ease with which an asset can be converted into cash.
liquidity
This is the interest rate that is actually observed in financial markets.
nominal interest rates
Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time. We usually refer to these firsttime issues...
...Trade off theory. 1. Strong industry trends in capital structure
Lowest levels of debt high cost of debt. Industries with great EBIT volatility and intangible assets: greater risk of financial distress. growth firms, firms with unique or specialized assets Drugs Computers
Highest levels of debt Industries with steady EBIT and tangible assets: lower risk of financial distress. high benefits of debt financing tend to use more debt. industries with a strong union presence. firms with stable CF.
The prospect of bankruptcy may further diminish cash flows. Why?Lawyers’ feesLoss in consumer confidenceManagers may not take care of equipment
Covenants clauses in debt contracts to avoid inefficient behavior.Problem with using equity finance perquisite consumption, agency costs of equity? LBOs may help solve the agency cost of equity problem
Many firms do not pay out all earnings as dividends. Allows investors to take equity return as a capital gain. Allows investors to defer personal taxes into the future
TE = effective personal tax rate on each dollar of earnings. TD = effective personal tax rate on each dollar of interest Tc=Corporate tax
D=total debt, also find for Vuwhen TD=TE, this reduces annual cash flows into values to: VL = VU + TCD Value gain from leverage decreases as TD  TE increases When (1TC) x (1TE) = (1TD), then there is no (tax) value gain from leverage. VL < VU + TCD, when TE < TD . VL < VU when (1TD) < (1TC)×(1TE)Bequity...
...Homework II – Managerial Economics – Fall 2011
Each question is worth 1 point.
1. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates
a. True
b. False
2. Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value
c. True
d. False
3. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present
e. True
f. False
4. As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
g. True
h. False
5. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a...
...
Chapter 5: Bonds, Bond Valuation, and Interest Rates
(5–1) Bond Valuation with Annual Payments
Jackson Corporation’s bonds have N=12 years remaining to maturity. Interest is paid annually, the bonds have a FV=$1,000 par value, and the coupon interest rate is PMT=8%. The bonds have a yield to maturity of I=9%. What is the current market price of these bonds? $928.39
Calculator solution: Input: N = 12, I = 9, PMT = 80, FV = 1000, Solve for PV = $928.39
(5–2) Yield to Maturity for Annual Payments
Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? .12475 or 12.48%
Calculator solution: Input N = 12, PV = 850, PMT = 100, FV = 1000, and solve for I = rd = %.
Or
Yield to maturity (financial) calculator.

Sources: http://www.moneychimp.com/calculator/bond_yield_calculator.htm 
(5–3) Current Yield for Annual Payments
Heath Foods’s bonds has 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield? 8.55%
Calculator solution: N=7,I/Y=8, PMT=90, fv=1000,CPT PV= 1052.06
current yield = coupon/current price
Thus, current yield=90/1052.06=8.55%
years to maturity  7 
face value of  $1,000 
yield to...
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