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Finance Exam 1
Terms in this set (31)
Explain what finance is.
Investing - allocating the firm's financial resources
Financing - acquiring financial resources for the firm
Dividends - paying out what is left over
Describe 3 decisions managers make and provide examples of each.
Market value is the current observed value of something. It is important because that is what you base investing decisions off of.
Define a market value and explain its importance.
Maximize shareholder wealth
Explain the goal of financial managers.
Differentiate between the roles of manager and shareholder.
Agency Problem. Managers work in their own self interests. Tie manager pay to performance of company.
Explain the inherent conflict between managers and shareholders and the mechanisms that attempt to mitigate this conflict.
Direct financing is a claim directly between creditor and debtor (IPO)
Indirect financing involves a third party (banks loaning deposits)
Explain the differences between direct and indirect financing and provide examples of each.
Primary Market - where supplier and demander of funds meet. New financial claim created.
Secondary Market - existing claims transferred between parties
Explain the differences between primary and secondary markets and provide examples of each.
Discuss how the financial markets provide estimates of value.
Contractual savings (pension)
Investment companies (mutual funds)
Describe different types of financial institutions and name some of each
Market value is the current value of an asset.
Book value is the historical cost of an asset adjusted for depreciation
Explain the conceptual difference between market value and book value. Why are finance people more concerned with market values than book values?
Pick a publicly traded company and estimate its total market value.
Opportunities for growth
The quality of the management team
Relationships with suppliers and customers, etc..
List some reasons the market and book values for a given company may differ.
Profit is not well defined and can be manipulated. Cash can be reinvested or return to shareholders, profit cannot.
Explain why cash flows are more relevant than net income.
Draw a basic timeline.
Describe the difference between cash flows and value.
Explain what an interest rate is and how it connects present and future values to one another.
Write intuitive definitions of "compounding" and "discounting".
The difference between the PV of cash inflows and PV of cash outflows over a period of time
Explain what a net present value is.
Find a present value and future value for a series of cash flows.
For a perpetuity, an annuity, and a growing perpetuity: be able to define the terms.
Find the present value when the first cash flow is at time 1.
Find the present value when the first cash flow is NOT at time 1.
Solve for a variable other than the present value.
Explain what an internal rate of return is.
Explain the relation between an APR and an EAR. In doing so, describe how and why changing the compounding period alters the amount of interest paid in a year.
Find a period interest rate given an APR and compounding period.
Solve for a loan payment when the compounding period is not one year.
Find the amount of money it takes to pay off a loan at a given point in the loan's life.
Define inflation and explain how it affects the interest rates we observe.
Explain the difference between nominal and real interest rates (as well as nominal and real cash flows).
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