1. Exam 1 Review 09/23/2008

2. Goal of the Firm Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price

3. Legal Forms of Business 1) Sole Proprietorship 2) Partnership -- General Partnership -- General Partnership -- Limited Partnership -- Limited Partnership -- Limited Liability Company (LLC) -- Limited Liability Company (LLC) 3) Corporation

4.  Primary Market  Secondary Market  Initial Public Offering (IPO)  Seasoned New Issue The Corporation and Financial Markets

5. Financial Management Axioms 1) Risk - return trade-off. 2) Time value of money. 3) Cash - not profits - is king. 4) Incremental cash flows count. 5) The curse of competitive markets.

6. Financial Management Axioms 6) Efficient capital markets. 7) The agency problem. 8) Taxes bias business decisions. 9) All risk is not equal. 10) Ethical dilemmas are everywhere in finance.

7. SALES SALES - Cost of Goods Sold GROSS PROFIT GROSS PROFIT - Operating Expenses OPERATING INCOME (EBIT) OPERATING INCOME (EBIT) - Interest Expense EARNINGS BEFORE TAXES (EBT) EARNINGS BEFORE TAXES (EBT) - Income Taxes EARNINGS AFTER TAXES (EAT) EARNINGS AFTER TAXES (EAT) - Preferred Stock Dividends - NET INCOME AVAILABLE TO COMMON STOCKHOLDERS TO COMMON STOCKHOLDERS Income Statement

8. Balance Sheet Assets Liabilities (Debt) & Equity Current Assets Current Assets Cash Cash Marketable Securities Marketable Securities Accounts Receivable Accounts Receivable Inventories Inventories Prepaid Expenses Fixed Assets Machinery & Equipment Machinery & Equipment Buildings and Land Buildings and Land Other Assets Investments & patents Current Liabilities Accounts Payable Accounts Payable Accrued Expenses Accrued Expenses Short-term notes Short-term notes Long-Term Liabilities Long-term notes Long-term notes Mortgages MortgagesEquity Preferred Stock Preferred Stock Common Stock (Par value) Common Stock (Par value) Paid in Capital Paid in Capital Retained Earnings Retained Earnings

9. Free Cash Flows Cash Flows from Assets = Cash Flows from Financing Cash flows generated through the firm’s assets = Cash flows paid to - or received from - the firm’s investors (creditors & stockholders)

10. Taxes  Marginal tax rate: the tax rate that would be applied to the next dollar of taxable income  Average tax rate: taxes owned by a firm divided by the firm’s taxable income  Always marginal

11. We will want to answer questions about the firm’s  Liquidity  Efficient use of Assets  Leverage (financing)  Profitability

12. Future and Present Value  FV = PV (1 + i) n  FV = PV (FVIF i, n )  FV = PV (e i*n ) -- continuous compounding  PV = FV (PVIF i, n )

13. Annuity and Annuity Due  FV = PMT (FVIFA i, n )  FV = PMT{ [ (1 + i) n – 1] / i}  PV = PMT (PVIFA i, n )  PV = PMT { [1 - 1 / (1 + i) n ] / i }  Perpetuity: PV = PMT / i

14. Annual Percentage Yield (APY) APY = ( 1 + ) m - 1 quoted rate m