MGT 326 Spring 2015 Final Exam Review 1 Question Types: Multiple choice, True/false w/ explanation, Short answer, Short essay, Fill-in-the-blank Problems: Multiple choice answer; must show all work / calculator inputs & cash flow diagrams Overview of Finance  The difference between Value and Price  Return, ROR, Yield, Rate of Profit [Profit/Investment] Chapter 5 Concept Questions  Explain why lenders charge interest  Define the components of interest rates (r = r*+IP+DRP+LP+MRP)  Know what a term structure of interest rates is  Define an interest rate Yield Curve  how to read it  what influences the shape of the yield curve  what the shape tells us about future interest rates  Make borrowing decisions using yield curve information  Understand the Opportunity Cost of Capital

MGT 326 Spring 2015 Final Exam Review 2 Chapter 4 Concept Questions  Future value (definition)  Present value (definition)  Compounding (definition)  Discounting (definition)  Explain Effective Annual Rate  Use Effective Annual Rate To Make a Boorowing or Investing Decision  The #1, all-important, never-to-be-forgotten process used to determine the theoretical/fair market value of any financial asset  Explain why this is true  r nominal, r periodic Types of Problems (work them any way you know how)  Find FV  Find PV  Find r  Find n  Annuities (ordinary & due) →Find PMT  Un-even cash flows  Perpetuities  EAR  Do all of the above using other-than-annual compounding  Perform All of the Above with Fractional (non-integer) Time Periods  Perform All of the Above in Cases Where Compounding Periods Per Year Aren't Equal To Payments Per Year  Be able to solve the above without the financial functions on your calculator (i.e. do the math)

MGT 326 Spring 2015 Final Exam Review 3 Chapter 6: Bonds Concept Questions:  Explain Selling At Par, At a Discount & At a Premium  Understand Bond Price Behavior wrt Changes in Market Interest Rates  Understand Bond Price Sensitivity wrt Maturity  Make Bond Investing Decision Using a Yield Curve Information Types of Problems:  Find retail price of a bond → Calculator Financial Functions (at coupon) (no date given) → Bond Worksheet (between coupons) (date given)  Given 2 bonds, which is most fairly priced  Find bond YTM  Find realized total return / yield for bonds Chapter 7: Stock Valuation Concept Questions:  Understand Fundamental Stock Concepts, Terms & Characteristics  Stock valuation concept: zero dividend growth, constant dividend growth, non-constant dividend growth (wrt corporate life cycle)  The cost of stock  what does it mean  how do firms meet the cost of stock Types of Problems:  Find fair market value/theoretical value of a non-constant dividend growth Stock Chapter 13: Cost of Capital  Explain why WACC is considered a firm’s required ROR

4 Chapter 8: Investment Decision Rules Concept Questions:  Types of projects and their relative risk  The principle behind:  payback period & discounted payback period, NPV, IRR  Strengths & weaknesses of the above  Disadvantage of IRR technique vs. NPV  reinvestment rate assumption  unconventional cash flows  NPV profiles  what they are  slope: sensitivity to change in discount rate  why they might cross  implications of NPV sensitivity to change in discount rate; what this tells you about the riskiness of a project  Risk Adjusted Discount Rate  What to do if projects have unequal lives  Why the WACC is used as the discount rate in NPV computations:  Why WACC is considered a project’s required ROR Types of Problems:  Discounted payback period, NPV, IRR  Find NPV of projects with unequal lives  Use Risk Adjusted Discount Rate in NPV Calculation MGT 326 Spring 2015 Final Exam Review

5 Chapters 11&12  Explain Systematic Risk and Unsystematic Risk  Describe the Causes of Systematic Risk and Unsystematic Risk  Explain Coefficient of Variation and Use It To Make An Investment Decision  Describe Diversification and How It Reduces the Riskiness of a Portfolio  Describe the CAPM Concept  Explain the Concept of Risk Aversion and Its Effects on Security Valuation and Return  Explain What Beta Is  Explain the Difference Between Rqd ROR of a Stock Computed with CAPM and Rqd ROR Derived From the Average of Historical Returns MGT 326 Spring 2015 Final Exam Review

6 Formulas ROR = Profit/Investment = (Sales Price –COGS)/COGS = (End Price – Begin Price) / Begin Price = (New – Old) / Old Cost of Money Nominal Interest Rate = r = r* + IP + DRP + LP + MRP Time Value of Money r periodic = r nominal /m n = m x T FV = PV(1 + r nominal /m) n PV = FV / (1 + r nominal /m) n EAR = (1 + r nominal /m) m – 1 PV perpetuity = PMT / r periodic Bonds Cpn = FV(r CPN /m) Capital Gains Yield = ROR Bond Total Yield = EAR Coupon + Capital Gains Yield Real ROR = [(1 + r nominal )/(1 + Inflation)] - 1 Stocks P 0 = D/ r s (zero growth dividend) P 0 = D 0 (1 + g) = D 1 (constant growth dividend) r s – g r s - g P 0 = PV 0 (CFs t1-tx ) + PV 0 (PV t=x, CFs 4-infinity ) (non-constant growth dividend) r s = D 0 /P -1 + (P 0 - P -1 )/P -1 r s = D 1 /P 0 + g OR D 1 /P 0 + (P 1 - P 0 )/P 0 P 1 = P 0 (1 + g/m) n OR V horizon Coefficient of Variation s /E(r) ≈ S/r realized CAPM MGT 326 Spring 2015 Final Exam Review