Financial Management: Comprehensive Final Exam Review Sheet
Financial Foundation
1. Understand income statements
2. Understand balance sheets
3. Understand how income statements and balance sheets “tie” together
4. Is paying back debt (principal) an expense on the income statement? Explain.
Time Value of Money; Stock Valuations; Bond Valuation
1. Be able to complete time value of money problems: Solving for I, N, PMT, PV single amount, FV single amount, PV annuity, and FV annuity
2. Be able to calculate effective annual rate
3. Be able to calculate future value problems when there is quarterly, monthly, weekly, or daily compounding
4. Be able to calculate the Yield-to-Maturity (YTM)
5. Be able to calculate the value of a bond
6. Be able to calculate the value of a stock using the P-E ratio (Price/Earnings)
7. Be able to calculate the value of a stock using the Gordon Growth Model
8. Be able to define and calculate the market capitalization of a company; that is, be able to figure out one of the three variables given two: Market Cap = shares outstanding X price per share
9. What is an amortization table? With a fixed rate, amortized loan, does interest increase or decrease as the loan nears maturity? Explain.
Cost of Capital and Risk and Return
1. Why might a company’s cost of debt increase?
2. How is cost of capital stated-- as a percentage or dollar amount?
3. What is the purpose of a bond rating?
4. How might a company’s decisions (e.g., capital budgeting, financing) change from an improvement in its debt rating? Explain your answer.
5. How might a financial manager use the yield curve to help him/her determine which financing alternatives to use?
6. How might you determine the cost of debt for a publicly traded company?
7. How does a small business owner determine the company’s cost of debt?
8. Is the after-tax cost of debt equal to the before tax cost of debt? Explain.
9. Why is it difficult to determine a company’s cost of equity?
10. If the interest on debt is tax deductible and dividend payments are not tax deductible, does the tax difference favor debt or equity financing? Explain.
11. Is the weighted average cost of capital the same as cost of capital?
12. What is collateral? Does collateral increase or decrease the cost of debt?
13. What factors determine a company’s cost of capital?
14. Define and understand the following types of risk: business, liquidity, default, market, interest rate, and purchasing power.
15. From an investor’s viewpoint, what is more risky—common stock or bond? Explain.
16. From a company’s perspective, is the cost of debt higher than the cost of equity? Explain.
17. Understand the concept of risk and return. The greater the risk, the ___ the expected return.
Financing a Business
1. Understand the concept of matching the life of an asset with the length and type of financing
2. How does a commercial lender at a bank or other financial institution determine whether a company should be approved for a commercial (i.e., business) loan? Understanding the seven 7 C’s of lending may help you answer this questions-- Credit, Capacity, Capital, Character, Conditions, Collateral, and Commitment.
3. Understand the various types of financing for both small and large businesses
Financial Statement Analysis
1. Have an understanding and be able to analyze the following financial ratios: Gross Profit Margin, Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE), Earnings Per Share (EPS), Current Ratio, Quick (aka acid-test) ratio, Debt Ratio, Times Interest Earned, Average Age of Inventory, and Average Collection Period
2. Understand how the addition or reduction of debt influences the various ratios-- That is, understand how the various ratios change based on a firm’s capital structure
Capital Structure/Financial Leverage
1. What is capital structure? What is financial leverage?
2. How does the capital structure affect the cost of capital?
3. Understand the ramifications for buying back stock and issuing stock
4. Understand the upside and downside of financial leverage-- The real estate example we used in class should be useful.
5. What does it mean, “. . . ability to service debt”? What is debt service? What portion of debt service is on the income statement?
6. What is a covenant? What is the purpose of a covenant?
7. What might happen if a company violates its covenants?
8. If a company does not have strong liquidity, is it a good candidate for issuing debt and retiring stock in equal amounts? Explain.
9. What does buying back bonds do to a company’s capital structure? Explain.
10. If a company is having liquidity problems, would you recommend buying back bonds without issuing more bonds or stock? Explain.
11. If a company is adjusting its capital structure by issuing more stock, what is the importance of the stock price?
12. Matching Assets with loan maturities: A company would like to finance inventory. What type of debt or loan would you recommend?
13. Matching Assets with loan maturities: A company would like to build a new warehouse. What type of debt or loan would you recommend? Approximately how long of an amortization period would you recommend?
14. Understand the elements that are relevant for financing decisions-- Note: Fricto Analysis might be a useful tool-- the six elements that are relevant for financing decisions: flexibility; risk (financial); income; control; timing; other
15. How can a company increase (decrease) its financial leverage?
16. If a company has no plans to issue stock or bonds, how does the change in a company’s stock price influence the company’s capital structure? Explain.
17. What is the importance of a company’s stock price if a company is considering a secondary offering (issuing stock)? Explain.
Financing Terms You Should Know
1. Line of Credit or Revolving Line of Credit
2. Short Term Loan
3. Capital
4. Mortgage
5. Equipment/Vehicle Loans
6. Factoring
7. Angel Investor
8. Venture Capital
9. Commercial Paper
10. Bond - Corporate
11. Preferred Stock
12. Common Stock
13. Initial Public Offering
14. Private Placement
15. Balloon Payment or Balloon Loan
16. Clean-Up Period
17. Interest Only Loan
18. Prime Rate
19. Variable Rate Loan
20. Amortization
21. Principal
22. Personal Guarantee
23. Collateral
25. Loan-to-Value
26. Unsecured
27. Non-recourse loan
28. Covenant (or restrictive covenant)
29. Lien
30. Loan Amortization
31. Loan Amortization Schedule
32. Debt Service
33. Prime Rate
34. Guaranteed Loan
35. Loan-to-Value
36. Bond Indenture
37. Subordinated Debentures
38. Call Feature
39. Convertible Bond
40. Junk Bonds
41. Secured Bond
42. Leveraged Buyout (LBO)
43. Sinking-fund Requirement
44. Aging Schedule
Cash Budget
1. Understand a cash budget and its purpose
2. Be able to prepare and interpret a cash budget
Capital Budgeting
1. Be able to define Capital Budgeting
2. Be able to define and apply the two of the three primary approaches to capital budgeting: Net Present Value (NPV), and Internal Rate of Return (IRR)
3. Understand the spreadsheet—Harvard: Jarring Line-- That is, understand how a company might determine cash flows and how depreciation influences cash flows-- Be able to calculate the NPV and IRR
Overall Suggestion: Work through my Financial Management website