MGT 326 Spring 2015 Final Exam Review
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
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MGT 326 Spring 2015 Final Exam Review
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
rnominal, rperiodic
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)
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MGT 326 Spring 2015 Final Exam Review
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
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MGT 326 Spring 2015 Final Exam Review
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
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MGT 326 Spring 2015 Final Exam Review
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
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MGT 326 Spring 2015 Final Exam Review
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
rperiodic = rnominal/m
n=mxT
FV = PV(1 + rnominal/m)n
PV = FV / (1 + rnominal/m)n
EAR = (1 + rnominal/m)m – 1
PVperpetuity = PMT / rperiodic
Bonds
Cpn = FV(rCPN/m)
Capital Gains Yield = ROR
Bond Total Yield = EARCoupon + Capital Gains Yield
Real ROR = [(1 + rnominal )/(1 + Inflation)] - 1
Stocks
P0 = D/ rs (zero growth dividend)
P0 = D0(1 + g) = D1 (constant growth dividend)
rs – g
rs - g
P0 = PV0(CFst1-tx) + PV0(PVt=x, CFs 4-infinity) (non-constant growth dividend)
rs = D0/P-1 + (P0 - P-1)/P-1
rs = D1/P0 + g OR D1/P0 + (P1 - P0)/P0
P1 = P0(1 + g/m)n OR Vhorizon
Coefficient of Variation s /E(r) ≈ S/rrealized
CAPM
rs = rRF + (rM – rRF)s
rp = rRF + (rM – rRF)p


=
Cost of Capital
rdt: rdt = rd(1 – T)
rs = rRF + (rM – rRF)
rPS: rPS = DPS / (P0 – Float Cost)
WACC = wdrdT + wpsrps + wsrs
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