Key Concepts for Introduction to Finance Midterm 1
Ch. 1 – Goals and Governance of the Firm
Investment vs. Financing decisions
Real vs. Financial assets
What is a corporation?
Other forms of business organization – sole proprietorship, partnership
Advantages and disadvantages of various forms of organization
The goal of managers is to maximize firm value
Agency problem
How corporations ensure that managers’ and stockholders’ interests coincide
Ch. 2 - Financial Markets and Institutions
Importance of financial markets and institutions
Financial markets – stock markets, bond markets, markets for commodities…
Primary market vs. secondary market
Financial intermediaries –mutual funds, ETFs, pension funds…
Advantages of mutual funds and ETFs
Financial institutions – banks, insurance companies
Differences between financial institutions and financial intermediaries
Functions of financial markets and intermediaries – transporting cash across time, risk transfer
and diversification, liquidity, payment mechanism, information
Opportunity cost of capital
Ch. 3 – Accounting and Finance
Statement of financial position
Book value vs. market value
Income Statement
Profit vs. cash flow
Taxes
Ch. 5 - Time Value of money
Single cash flow: future value, present value, how to find discount rate
Annuity: present value, how to find cash flow, annuity due, growing annuity, multiple payments
per year, amortization
Perpetuity: present value, how to find cash flow, how to find discount rate, growing perpetuity
Relationship between discount rate and PV
Inflation –real vs. nominal interest rates
Compounding (EAR)
Ch. 6 - Bonds
Calculate PV with annual or semi-annual coupons
How bond prices vary with interest rates
Relationships between - coupon rate, YTM, current yield, rates of return, and prices
Relationships between risk and maturity, risk and coupon rate
Yield curve – expectations theory, liquidity-preference theory
Bond ratings and default premium
Ch. 7 - Stocks
Dividend discount model: no growth, constant growth, non-constant growth, sustainable growth
rate
Relationship between price and growth rate, ROE, plowback ratio, discount rate
Market efficiency
Ch. 11 - Risk and return
Measuring return and risk (standard deviation)
Relationship between risk and return
Portfolio return and standard deviation
Unique vs market risk
Benefits of diversification
Ch. 12 - CAPM
Beta - market risk
Portfolio betas
Security market line and CAPM relationship
Company risk vs project risk
Ch. 13 - WACC
Calculations – Market values of debt and equity, costs of debt and equity
Uses of WACC
How changing capital structure affects debt and equity when there is no tax
You do not need to know how about levered and unlevered betas
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