Introduction into Managerial Finance, The Corporation and Repetition of Financial Statement Analysis

1. List and define the four major types of firms in the U.S.; describe major characteristics of each type, including the means for distributing income to owners.

2. Distinguish between limited and unlimited liability, and list firm types that are subject to each.

3. Describe taxation consequences for C and S corporate forms.

4. List the four major financial statements required by the SEC for publicly traded firms, define each of the four statements, and explain why each of these financial statements is valuable.

5. Discuss the difference between book value of stockholders’ equity and market value of stockholders’ equity; explain why the two numbers are almost never the same.

6. Compute the following measures, and describe their usefulness in assessing firm performance: the debt-equity ratio, the enterprise value, earnings per share, operating margin, net profit margin, accounts receivable days, accounts payable days, inventory days, interest coverage ratio, return on equity, return on assets, price-earnings ratio, and market-to-book ratio.

Arbitrage and Financial Decision Making

1. Assess the relative merits of two-period projects using net present value.

2. Define the term “competitive market,” give examples of markets that are competitive and some that aren’t, and discuss the importance of a competitive market in determining the value of a good.

3. Explain why maximizing NPV is always the correct decision rule.

4. Define arbitrage, and discuss its role in asset pricing. How does it relate to the Law of One Price?

The Time Value of Money

1. Draw a timeline illustrating a given set of cash flows.

2. List and describe the three rules of time travel.

3. Calculate the future value of: A single sum, An uneven stream of cash flows, starting either now or sometime in the future, An annuity, starting either now or sometime in the future

Investment Decision Rules

1. Define net present value, payback period, internal rate of return, profitability index, and incremental IRR.

2. Describe decision rules for each of the tools in objective 1, for both stand-alone and mutually exclusive projects.

3. Given cash flows, compute the NPV, payback period, internal rate of return, profitability index, and incremental IRR for a given project.

4. Compare each of the capital budgeting tools above, and tell why NPV always gives the correct decision.

Fundamentals of Capital Budgeting

1. Given a set of facts, identify relevant cash flows for a capital budgeting problem.

2. Explain why opportunity costs must be included in cash flows, while sunk costs and interest expense must not.

3. Calculate taxes that must be paid, including tax loss carryforwards and carrybacks.

Capital Markets and the Pricing of Risk

1. Define a probability distribution, the mean, the variance, the standard deviation, and the volatility.

2. Compute the realized or total return for an investment.

3. Using the empirical distribution of realized returns, estimate expected return, variance, and standard deviation (or volatility) of returns.

4. Use the standard error of the estimate to gauge the amount of estimation error in the average.

Capital Markets and the Pricing of Risk

1. Discuss how beta can be used to measure the systematic risk of a security.

2. Use the Capital Asset Pricing Model to calculate the expected return for a risky security.

3. Use the Capital Asset Pricing Model to calculate the cost of capital for a particular project.

4. Explain why in an efficient capital market the cost of capital depends on systematic risk rather than diversifiable risk.

Optimal Portfolio Choice and Capital Asset Pricing Model

1. Given a portfolio of stocks, including the holdings in each stock and the expected return in each stock, compute the following:

2. Compute the variance of an equally weighted portfolio, using equation 11.12.

3. Describe the contribution of each security to the portfolio.

Estimating the Cost of Capital

1. List the three main assumptions underlying the Capital Asset Pricing Model.

2. Explain why the CAPM implies that the market portfolio of all risky securities is the efficient portfolio.

3. Compare and contrast the capital market line with the security market line.

4. Define beta for an individual stock and for a portfolio.

5. Define alpha, discuss implications of the CAPM for alpha, and discuss the implications if alpha is not zero.