FIN 365 Business Finance

1. FIN 365 Business Finance Exam 1: Review Larry Schrenk, Instructor

2. Topics • Exam Description and Policies • Coverage (through Topic 4) • Study Suggestions • Sample Problems

3. Description of the Exam • Length: 1 hour, 15 minutes • Weight: 20% of course grade • Structure: • Conceptual Questions • Calculations

4. Exam Policies • You may use a financial calculator. • You may not use the textbook, notes, etc. The formulae below are provided for study only. • You may not substitute a phone or tabletfor the calculator. • For calculations you must show work for any credit. • In yours answers, provide two decimal point accuracy for dollars, e.g., $14.13, and four decimal points for percentages, e.g., 0.0134 or 1.34%. • Make-up exams will only be given if there is official documentation of an emergency.

5. Coverage 1 • Topic 1–Introduction to Finance • The function of finance in the firm and the economy • The basic themes and issues in finance • The fundamental forms of business organization

6. Coverage 2 • Topic 2–Financial Markets… • The function of markets • Types of markets • Types and functions of financial institutions • The mechanics of stock markets • Stock market efficiency

7. Coverage 3 • Topic 3–Financial Statements… • Flow versus stock statements • Annualization • The function/organization of financial statements • Free cash flow • The structure and working of taxation • Average versus marginal taxes

8. Coverage 4 • Topic 4–Analysis of Financial Statements • The classes of ratios and how they are used • Ratios calculation, including the DuPont equation (See Study Guide for list) • What a specific ratio says about a firm • Limitation and misuse of ratios

9. Study Suggestions • Study in groups • Use flashcards for ideas, definitions, theories, etc. • Do a lot of practice problems

10. Studying for Conceptual Questions • Study the slides–Anything that is the subject of a full slide is important. • Read the textbook. IMPORTANT: You are responsible for the assigned textbook material even if we do not cover the material in class. • Know the key words from the textbook which are listed at the end of the chapter. • Answer the end of chapter questions–the solutions are in Blackboard. • Review your class notes–Anything occurring multiple times is important especially if it is mentioned under different topics.

11. Studying for Calculations • Study the examples done in class and the worked problem sets. • Answer and understand the end of chapter problems–The solutions are in Blackboard. • Do the CengageNOW assignments

12. Conceptual Questions 1-5 1. What is a corporate raider? (5 points) Key Term Chapter 1 2. Describe the proper use of the DuPont equation? (5 points) Key Term Chapter 4, Slides, Text 101-103 3. Distinguish primary from secondary markets. (5 points) Key Term Chapter 2, Q 2-3 4. What is the effect on the current ratio of collecting more accounts receivable? Explain briefly. (5 points) Key Term Chapter 4, Q 4-10q 5. What is the intrinsic value of a stock and how can it be calculated or estimated? (5 points) Key Term Chapter 1, Q 1-3

13. Conceptual Questions 6-10 6. What would be the cost of holding too much cash? (5 points) Slides 7. What is an IPO? (5 points) Key Term Chapter 2, Q 2-3 8. Give an example of a situation in which the quick ratio would be essential in your financial analysis. (5 points) Key Term Chapter 4, Slides 9. What is one important economic function of financial institutions? (5 points) Key Term Chapter 2, Q 2-2 10. Evaluate the following statement: “If markets are efficient, investors will not experience extremely high returns.” (5 points) Key Term Chapter 2, Q 2-9

14. Problem 11 • What is Intel’s 2009 net working capital? Use the financial statements below. (10 points) Working Capital = Current Assets – (Payables + Accruals) or Working Capital = Current Assets – Current Liabilities 18,467 – 7,079 = $11,338 EoC Problem 3-7

15. Problem 12 • Using the 2009 income statement below, construct the income statement for 2010 using the following assumptions: (10 points) 2009 2010 Sales $2,000 2,240 Operating costs (excl. Deprec.)1,300 1,430 Depreciation 400 400 EBIT 300 410 Taxes (40%) 120 164 Net income 180 246 EoC Problem 3-8

16. Problem 13 • What is Intel’s 2009 market-to-book ratio? Use the financial statements below. (10 points) Two Ways 1) Use Per Share Values Market Value per Share = 19.56 Book Value per Share = Book Value/Shares Outstanding $39,047,000,000/5,598,000,000 = 6.9752 Market to Book Ratio = 19.56/6.9752 = 2.80

17. Problem 13 (cont’d) • What is Intel’s 2009 market-to-book ratio? Use the financial statements below. (10 points) 2) Use Total Values Market Value = Share price x Shares Outstanding 19.56 x 5,598,000,000 = $109,496,880,000 Book Value (from Balance Sheet) = $39,047,000,000 Market to Book Ratio = 109,496,880,000/39,047,000,000 = 2.80 EoC Problem 4-9

18. Problem 14 • What is Intel’s total assets turnover ratio in 2009? Use the financial statements below. (10 points)   Total Asset Turnover = Sale/Total Assets (4 x 8,024)/49,061 = 0.6542 times Ratio Calculation

19. Problem 15 • A firm with a return on equity of 12% has a total assets turnover of 2 times and an equity multiplier of 1.5 times. What is its profit margin? (10 points)   DuPont Equation: ROE = Profit Margin x Total Assets Turnover x Equity Multiplier Profit Margin = ROE/(Total Assets Turnover x Equity Multiplier) 0.12/(2 x 1.5) = 0.0400 (4.00%) EoC Problem 4-13