Midterm Exam Review Session

BU473 Fall 2012: Midterm Information The final exam will be held on Saturday October 27th from 10:00 to 12:00 The exam will last for 2 hours Room assignments are posted on MyLearningSpace The midterm will cover chapters 1, 2, 3, 4, 8, 9, 15, 17, 18 and 20. For Chapter 9 the midterm covers until page 246 from the book and the lecture slides posted as: "Chapter 9 part I“ For chapter 20 focus on what was covered in class while discussing chapter 9

BU473 Fall 2012: Midterm Information Students are responsible for both the material covered in class as well as the material in the textbook. The exam is primarily, but not exclusively, quantitative. (66% of the exam is quantitative and 34% is qualitative.) Both the quantitative and the qualitative questions are predominantly from the material covered in class (i.e., the lecture notes). Most of the quantitative questions are similar to the numerical examples discussed in class. For qualitative questions, students may want to refer to the textbook for more details. In particular, students should review the institutional and descriptive details contained in the textbook.

BU473 Fall 2012: Midterm Information Students will be provided with a basic formula sheet. It is expected that students know most of the formulas, thus the formula sheet will include only few difficult formulas. The formula sheet is posted in mylearningspace . Students must be bring a calculator to the exam. Exam Format:   17 qualitative multiple choice questions = 34% of the exam 16 quantitative multiple choice questions = 42% of the exam 2 problems = 24% of the exam Total 100%

BU473 Fall 2012: Midterm Information Number of Multiple choice questions by chapter:

Quantitative Questions may come from: Calculation of growth rates, return rates and yields. Arithmetic and Geometric mean returns Calculation of returns and yields for individual securities and portfolios. Calculation of time weighed and dollar weighed returns. Margin requirements, maintenance and margin calls.

Quantitative Questions may come from: Short selling: margin requirements and returns. Computation of indexes: price, market or equally weighted and their returns. Net Asset Value NAV Risk adjusted measures of performance

Quantitative Questions may come from: Portfolio performance with respect to a benchmark: tracking error, attribution analysis (allocation and selection) and style analysis. Style identification of value and growth investors Measuring market timing skills DDM, FCFF, FCFE valuation methodologies.

Quantitative Questions may come from: Computation of the cost of equity capital, k and WACC. Estimation of dividends and earnings growth rates Valuation using: two, three or more stages DDM, FCFF or FCFE models.

Qualitative Questions may come from: Risk and return relation Securities market line Fundamental risk systematic risk, unsystematic risk. What is the importance of international diversification for Canadian Investors? Understand the advantages and disadvantages or investing internationally. How we compare Canadian markets with other markets. Organization and functioning of security markets, types of markets, primary and secondary markets, underwriters, major exchanges Types or orders, margin transactions and short sales

Qualitative Questions may come from: Close end funds, open end funds, ETF and Hedge funds, main characteristics and differences Basics of the asset allocation decision and the policy statement. Understand how the asset allocation decision changes depending on the objectives and constraints of the investor. Investment styles, active and passive, value and growth investments, top-down and bottom-up, rotation and 130/30. Technical strategies, contrarian, momentum. Calendar anomalies and firm attributes. Use and interpretation of risk adjusted measures of performance

Qualitative Questions may come from: Differences good, defensive, cyclical and speculative companies and stocks. Understanding of the individual, company and industry life cycles. Understand the difference in the level of risk of different financial instruments, as stocks, bonds , etc. Understand the theoretical background of the DDM, FCFF and FCFE models. Principal problems in the real life applications of the DDM, FCFF and FCFE models.

Example 18.4 Managed Portfolio: return = 35% st dev = 42% Market Portfolio: return = 28% st dev = 30% T-bill return = 6%

Example 9.3: Nike Co.

Example 9.3: Nike Other Information Share price: $42.09 Market value of debt: $1,296.6 million YTM on debt: 7.16% No preferred shares Shares outstanding: 271.5 million NWC in 2001: $2,699.35 million BU473/Chapter 14 & 15

Sensitivity Test by changing WACC Example 9.3: Forecast FCF WACC Sensitivity Test by changing WACC

Example 9.3: Estimate WACC