FIN 301 Final Exam Study Guide PDF

Preview

Summary

FINAL EXAM terms and ideas ...

Description

FINAL EXAM KEY TERMS & IDEAS What is a firm's "job" To make the owners as rich as possible What are the three characteristics people generally desire of their positive cash flows? More, sooner, safer What is the "reality" in finance? The cash flow What gold backs the dollar? There is no sense in which the gold "backs" the dollar What does your instructor mean by saying that present value measures reality? Two cash flows with the same present value are equivalent According to your instructor, what is compounding? Compounding is the periodic change in the base upon which interest accrues such that the new base includes accumulated interest Under annual compounding APR = EAR How do stock prices typically vary with changes in the discount rate? stock prices tend to go up when discount rates go down and down when discounts rates go up What are valuation multiples? none of the above Which of the following is a way that IRR can go wrong IRR may rank rival projects wrongly What is net working capital ? none of the above ( on the exam) Why do we need managers and entrepreneurs? We are uncertain about our uncertainty

Why does a corporation's equity usually have a higher discount rate than its debt? debt service has priority over dividends What is the preferred investment criterion? NPV is preferred to IRR Which is better for estimating next period's return on assets? - Arithmetic average - is better for looking forward, at least if you are estimating a one - period forward rate Which is better for calculating past return on assets? -Geometric average - is better for looking back to see how you did over some period of time Know what WACC stands for Weighted Average Cost of Capital Know what CAPM stands for Capital Asset Pricing Model Know whether greater risk necessarily implies greater return - NO - More total risk does not necessarily imply a greater perspective return Know whether systematic risk is diversifiable and whether it requires a risk premium - Not diversifiable - Yes it requires a risk premium Know whether unsystematic risk is diversifiable and whether it requires a risk premium - Diversifiable - Does not require a risk premium Know that the CAPM model implies that we all hold the market portfolio Know why there is a tax advantage to debt financing - because interest is tax deductible Know what one word says it all when it comes to the future

- you never know Know which is more important, the formula or the principle behind the formula - principle behind the formula...