Special Saturday Session: Midterm Review Session Corporate Finance (GSBA 548) J. K. Dietrich, March 31, 2007 1

Midterm Examination Material through class of March 28 (LA) or March 27 (OCC) Includes text chapters 1, 2, 3, 4, 5, 7, 14, and 20, and other assigned readings Covers material contained in assigned end-of-chapter problems and Part 1 of group project Questions will come from End-of-chapter problems Class objectives and vocabulary Group project concepts and calculations

Major Focus of Midterm Material in lectures and text concerned with topics in chapters 4, 5, and 7 Basic finance principles discussed so far: Goal is to maximize shareholders’ wealth Corporate governance developed to achieve goal Wealth is the present value of consumption and wealth is increased with positive NPV projects Value is the present value of cash flows at the risk adjusted discount rate Cash, time, risk determine value

Principles and Techniques Six present value formulas are techniques needed to estimate values and accounting for timing Applications of simple present value formulas are used as techniques to value fixed-income securities since cash flows are contractually specified Stock (equity, share) values do not have fixed cash flow patterns but formulas useful in studying stock values and P-E ratios

Estimating Future Cash Flows A financial decision to invest is analyzed in terms of its impact on incremental cash flows Revenues, costs, taxes, working capital, and capital expenditures are the important elements of cash flows for business decisions Revenue and operating assumptions are necessary to estimate each of these elements

Text, Lectures, and Project Basic finance principles are the focus of the text assignments and problems Class discussion illustrates basic finance principles with Wall Street Journal data, stories, and group project In class, we have stressed corporate governance and book and market values (Chapter 1), real-life examples of corporate debt (Chapter 5), and cash flows from investments (Chapter 7)

Topics Not Covered in Readings Bond prices in NASD Bondinfo and from other sources like Wall Street Journal Debt details in notes to financial statements Constant principle-payment loan formula Investment decision rules like payback period, average accounting return (both bad), internal rate of return (problematic) Capital budgeting and profitability index All these are discussed on class slides

Suggestions for Midterm Review Review course syllabus, weekly class objectives (with vocabulary) Memorize present value formulas and identify their use in present value problems and evaluation fixed incomes Review class slides Know your group project Sheet 1 results and understand why book and market values differ Understand Baldwin and similar examples