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 Goal of financial management – Maximize shareholder value/firm value – Agency problem Financial Markets & Intermediaries

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

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

Real & Nominal Interest Rates How to measure inflation? – Consumer Price Index (CPI) Real vs Nominal – Fisher equation – Real value of $1 – PV real vs PV nominal – Matching CF with r Growing perpetuity – PV=CF/(r-g)

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

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

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

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.

Capital Budgeting Incremental CF – Pro forma financial statements – OCF, NWC, CAPEX Depreciation tax shield Taxes from asset sale ΔRevenue -ΔCosts -ΔDepreciation =ΔEBIT -ΔTaxes =ΔEAT +ΔDepreciation -ΔCAPEX +ΔAsset Sale -ΔOpportunity Cost -ΔNWC =ΔFCF

Issues with NPV Lifespan problem – Common end-year – Equivalent Annual Annuity (EAA) Real options – Decision tree

Alternatives to NPV Internal Rate of Return – Decision rule – Financing opportunity – Equivalence of IRR & NPV Payback period – Decision rule – Limitations

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

Cost of Capital Beta approach – Equity beta & asset beta Weighted Average Cost of Capital – Cost of debt – Cost of equity

Capital Structure M&M Propositions I & II – 3 assumptions – The “pie” Interest Tax Shield Modified WACC Value of unleveraged and leveraged firm

Market Efficiency Three forms of market efficiency Weak-form Semi-strong form Strong form