managerial finance exam

March 28 (Thursday)

10:00-11:15am (entire lecture) Don’t be late!

Exam will take place in class

Exam will be online via Blackboard (just like Quizzes & Midterm #1)

Rules for our online exam:

Bring:

Review:

The exam will have:

Review the following:

Chapter 8 “Stocks”:

· Stock vs. bonds: What’s the difference? What do they have in common?

· Stock types

· Common stock & main features (slides 6, 41, 42)

· Preferred stock & main features (slides 6, 41, 43)

· Stock price calculations

· In general: Stock price = PV of all future dividends

· (1) “Constant dividend” (or “zero growth dividend”) case & calculations

· (2) “Constant dividend growth” case & calculations

· Calculate today’s stock price, if today’s dividend is given

· Calculate today’s stock price, if next year’s dividend is given

· Calculate future stock price

· Rate of growth of dividend amount = rate of growth of stock price

· (3) “Non-constant dividend growth” case & calculations

· Calculation for “no dividend” case

· Calculation for “uneven growth” case

· Calculation for “supernormal growth” (or “two-stage growth”) case

· Stock return and its two components

· (1) Dividend income & dividend yield

· (2) Capital gain & capital gains yield

· (3) = (1) + (2) Total dollar return & total percentage return

· The two components of stock return in “constant dividend growth” case

· Notice that “g” is not only the annual rate of growth of dividends, but also the annual rate of growth of stock price (i.e., capital gains yield)

Chapter 9 “Investment Valuation”:

· “Capital budgeting”: what does this term mean?

· “Mutually exclusive” vs. “independent” projects. How do we decide which project to accept when we are comparing 2+ projects?

· (1) Net Present Value (NPV) method

· Calculations

· Definition of “NPV”

· The “NPV rule” for making investment decision

· Advantages & disadvantages

· (2) Profitability (PI) method

· Calculations

· Definition of “PI”

· The “PI rule” for making investment decision

· Issues: when the traditional “PI rule” may stop working

· Comparing 2 mutually exclusive projects: may mistakenly choose the project with the highest PI, but the other project has a higher NPV

· Advantages & disadvantages

· (3) Payback Period method

· Calculations

· Definition of “payback period”

· The “Payback Period rule” for making investment decision

· Issues: when the traditional “Payback Period rule” may stop working

· Comparing 2 mutually exclusive projects: may mistakenly choose the project with the lowest Payback Period, but the other project has a higher NPV

· Advantages & disadvantages

· (4) Internal Rate of Return (IRR) method

· Calculations

· Definition of “IRR”

· The “IRR rule” for making investment decision

· “NPV profile” = graphical relationship between NPV and discount rate

· Issues: when the traditional “IRR rule” may stop working

· “Non-conventional” (rather than “conventional”) cash flows

· Cash inflow followed by cash outflows (i.e., “financing” rather than “investing” type project)

· Cash flows changes signs more than once

· Comparing 2 mutually exclusive projects. How do you calculate the “crossover rate”?

· Advantages & disadvantages

· Conclusion: “NPV” method is superior to all other methods!!!

Chapter 2 “Financial Statements”:

· 2 types of Financial Statements

· (1) Balance Sheet

· = “at a point of time”

· Left-hand side: assets (components?)

· Right-hand side: liabilities (components?) and equity (components?)

· Calculations based on the “balance sheet identity”

· What is the difference between “market value” and “book value”?

· What is “financial leverage”?

· Calculation of Net Working Capital

· (2) Income Statement

· = “over a period of time”

· Calculation of Net Income

· Depreciation as a “noncash” item. What does it mean?

· Cash flow from assets (or “free cash flow”)

· Cash inflow vs. cash outflow

· Cash flow identity. What does it show?

Chapter 10 “More on Net Present Value”:

· Review of how the NPV approach works

· Cash flows relevant/irrelevant to project evaluation

· What do we mean by “Incremental Cash Flows”?

· What does “The Stand-Alone Principle” say?

· Relevant cash flows

· side effects (“erosion”, “synergy”), opportunity costs, NWC, taxes, revenues, fixed & variable costs, depreciation, initial investment, salvage value

· Irrelevant cash flows

· “sunk costs” (what are those?), financing costs (what are those?)

· Project cash flows and NPV

· Project Cash Flow = (1) Project Operating Cash Flow + (2) Project Net Capital Spending + (3) Project Change In Net Working Capital, and calculations

· (1) Project Operating Cash Flow (OCF)

- What is the difference between Net Income & OCF?

- 4 methods of calculating OCF

· (2) Project Net Capital Spending (NCS)

· What are the components of NCS?

· After-tax salvage value

· Straight-line depreciation vs. MACRS depreciation

· Calculation of annual depreciation, accumulated depreciation, remaining book value for each depreciation type

· Market price (=sale price) vs. remaining book value, and salvage value calculations

· (3) Project Change in Net Working Capital (NWC)

· What are the components of NWC?

· Calculation of NWC & change in NWC

· Using Project Cash Flows to calculate NPV: financial calculator “cash flow keys”

· Capital budgeting examples

· Standard project, calculations

· “Cost cutting” project, calculations

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