1 Corporate Finance: Review for Midterm #2 Professor Scott Hoover Business Administration 221

2 Growth  What is the optimal growth rate for a company? simple assumptions Intuition  We typically must buy assets to generate higher sales  There must be a corresponding increase in liabilities and equity.  To avoid violating our assumptions, the source of growth must be retained earnings (plus a small increase in debt to keep the debt ratio constant) Note: It is possible for a firm to grow too fast.  How can a firm grow at a faster rate than g*?  What happens if the firm is unable to find enough sales to grow at g*?

3 Forecasting  What is financial forecasting?  Why is financial forecasting important?  Long-Term Forecasting Methodology Objectives  Short-Term Forecasting Methodology Objectives

4  Financing How much debt should a firm have?  Benefits of Debt  Drawbacks of Debt A Second Look at ROE….  The relationship between interest rates on debt and ROIC FRICTO Analysis Difficulties in determining the optimal level of debt

5 Securities  Bonds relationship between values and interest rates sources of returns yield-to-maturity  annual coupons  non-annual coupons valuation provisions

6  Derivatives call options put options futures/forward use of derivatives

7 Approximate Exam Structure  6 questions Topics  1 Growth (14 points)  3 Securities (36 points)  1 Short-Term Forecasting (20)  1 Long-Term Forecasting/Financing (30 points) Type  5 Numerical Calculation Problems (78 points)  2+ Short Answer (22 points)