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Study Guide - Test 1
General Information
*Expect the test to have 1) theory and 2) problems. All the questions for theory will be in a multiple-choice format. There will be some problems in a multiple-choice format, some shorter written problems and one longer problem
*The weights will be about 35% theory and 65% problems.
*Come see me for help!
* Go to the lab and review the problems and earn points
* DO NOT MISS THE TEST!
Important:
You will be assigned a different seat for the test
No electronic translators (you may bring a paper dictionary)
No cell phones at all (you cant use one as a calculator)
Theory Section
*This is a listing of the topics you need to know. Any topics that are not mentioned below will NOT be in the test.
*Please note that the each topic line is broad-that is, do not simply answer or cover each line with one quick response-build a set of notes around each.
Chapter 1
* Goal of the firm/goal of the financial manager (what is, how do you express it in practical terms?
*What determines price of stock/what should manager do with CFs? What are the characteristics of those cash flows
*Agency relationships (conflict between managers and shareholders). How can you solve or lessen this conflict
Chapter 3
*Balance sheet (def, logic (concept), basic categories,)
*Understand each category-why AP and accruals beneficial?
* What is working capital, what is net working capital, how do you compute it?
*Income statement (what is it, basic categories, where are interest payments? are they before or after taxes, understand depreciation?)
* Why is EBIT important-usefulness compared to net income?
* You need to have a very good feel for what is contained on these statements-If you dont know immediately where (for example) retained earnings is found or where interest expense is found-you need to spend more time getting familiar with them.
*Stmt. of Shareholder equity (logic, is RE cash?)
*What is depreciation? Is it a cash outlay? Is being able to depreciate an asset more quickly beneficial?
*Relationship between depreciation, and net income and taxes. Different income statements for a company?
*Statement of Cfs (logic, categories, some examples within the categories) i.e-is an increase in AP a drain on cash or not? What about changes in inventories? That type of thing
*Modifying the financial statements (setting up for FCF)
* Free cash flows (definitions, logic, why free, why important)
* Logic of the FCF equation
*What is operating income after taxes- know how to compute- why is it computed?
* Explain the right side of the FCF equation-what is change in net fixed assets, change in net working capital
*What is the logic behind MVA?
* Be able to compute FCF and MVA
* Progressive taxes, marginal taxes, average taxes (explain and understand)
* What is the tax treatment of interest payments and dividends? Differences? Impact on investor return, what does the tax code favor?
* Explain carry back and carry forward-what is being offset by the losses?
*Be able to compute the tax bill for a corporation
*Be able to compute what type of tax refunds a company would get given carry backs and carry forwards
Chapter 4
*What are liquidity ratios; what do they tell us? What is the current ratio telling you? Is there a magic number to assess it? Why do we use a quick ratio?
*What is the role of asset management ratios? What are the problems with too high or too low? What is the meaning of the inventory turnover ratio? A high one could imply what? Low one? How do you go about analyzing your DSO ratioHow can you attempt to solve problems here? What is the impact of tightening credit terms? Fixed asset and total asset turnovers; what do they tell us? What is low FATO telling you? High? If the fixed asset turnover is good but the total asset turnover is still weak, where is the problem?
* Make sure you can compute for the ideal level of assets given the benchmark
*Impact of leverage in terms of risk and return (ROE). What if company is highly leveraged and the economy turns bad? Turns good? Compared to a zero debt company?
*What implications a high debt ratio would have on borrowing more?
*What does the TIE ratio tell us? Do we want it to be high or low?
*What does the profit margin tell us? How does debt affect this ratio? Understand how the profit margin ratio is a measure of expense control. What are ROA and ROE telling us? Why compute BEP?
*What is the P/E ratio measuring? What is the market to book ratio? (similar to MVA?)
*What is the use of DuPont equations? What are the two ratios that make-up the basic DuPont (ROA) equation? What are the three ratios that make-up the extended DuPont (ROE)? Keep in mind how the profit margin side focuses on expense control and how the TATO side focuses on asset management. Remember that individual asset mgt rations can then pinpoint where the problem lies.
*Understand the logic of the equity multiplier in the DuPont. How is this factor affected by more or less debt? For example, if you have an equity multiplier of 1, what does that imply about your level of debt? As debt increases, what happens to the equity multiplier? * In the end, what are the three factors driving ROE?
Problems
*The problems will be similar to those assigned in homework or those that I used as an example on the board.
*When you study these, make sure you 1st understand the concept behind the problem.
* I see a lot mistakes when students work a problem by blindly following some pattern but never understanding what they are doing. When this is done and then the problem is not identical to this memorized patterns, mistakes happen.
*Work your homework problems and board examples enough times so that you feel familiar with the process. But as you work them, think about what you are doing and why (understand). That is, always think about the concepts and the process.
Make sure you are familiar with all problems/examples on the board
Make sure you work all the problems that were assigned (see your syllabus)
Formulas
*For Chapter 3 and 4, I will give you a formula sheet that has the formulas for:
Quick Ratio, ITO, DSO, FATO, TATO, Debt ratio, TIE, PM, ROA, BEP, EM
I will also give you on that formula sheet the following information:
MVA = Market Value of Equity Book Value of the Equity
FCF = Operating Income after taxes Investments needed to sustain and grow the company
Notice on these two above that you still need to know how to use them and how to get each factor:
* You will need to know/memorize how to compute (no formulas given here):
-Net working capital
-Operating income after taxes
-Investments needed to sustain and grow company
*For Chapter 4, you must know/memorize only three formulas
Current Ratio
ROE
Extended DuPont Equation.
All other formulas/ratios in chapter 4 will be given.
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