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

2. 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

3. 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

4. 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

5. 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

6. 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)

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

8. 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