Financial Foundation



Financial Management: Comprehensive Final Exam Review Sheet

Financial Foundation

1. Understand income statements.

2. Understand balance sheets.

3. Understand how income statements and balance sheets “tie” together. That is, understand how dividend payments, net income, issuing stock, or buying back stock changes equity on the balance sheet.

Time Value of Money; Stock Valuations; Bond Valuation

1. Be able to complete time value of money problems: Solving for annual PV single amount, FV single amount, PV annuity, and FV annuity problems

2. Be able to calculate effective annual rate.

3. Be able to calculate future value problems when there is quarterly, monthly, weekly, or daily compounding.

4. Be able to calculate the Yield-to-Maturity (YTM).

5. Be able to calculate the value of a bond.

6. Be able to calculate the value of a stock using the P-E ratio (Price/Earnings)

7. Be able to define and calculate the market capitalization of a company.

Cost of Capital and Risk and Return

1. Why might a company’s cost of debt increase?

2. How is cost of capital stated-- as a percentage or dollar amount?

3. How might a company’s decisions (e.g., capital budgeting, financing) change from an improvement in its debt rating?

4. How might a financial manager use the yield curve to help him/her determine what financing alternatives to use?

5. How might you determine the cost of debt for a publicly traded company?

6. How does a small business owner determine the company’s cost of debt?

7. Is the after-tax cost of debt equal to the before tax cost of debt? Explain.

8. How might you determine the cost of equity for a publicly traded company?

9. How might you determine the cost of equity for a small business?

10. If the interest on debt is tax deductible and dividend payments are not tax deductible, does the tax difference favor debt or equity financing? Explain.

11. Is the weighted average cost of capital the same as cost of capital?

12. What is collateral? Does collateral increase or decrease the cost of debt?

13. What factors determine a company’s cost of capital?

14. Define and understand the following types of risk: business, liquidity, default, market, interest rate, and purchasing power.

15. From an investor’s viewpoint, what is more risky—a General Motors stock or a General Motors bond? Explain.

16. From General Motor’s perspective, is the cost of debt higher than the cost of equity? Explain.

17. Understand the concept of risk and return. The greater the risk, the ___ the expected return.

Financing a Business

1. Understand the concept of matching the life of an asset with the length and type of financing.

2. How does a commercial lender at a bank or other financial institution determine whether a company should be approved for a commercial (i.e., business) loan? Understanding the seven 7 C’s of lending may help you answer this questions-- Credit, Capacity, Capital, Character, Conditions, Collateral, and Commitment.

Financial Statement Analysis

1. Have an understanding and be able to analyze the following financial ratios: Gross Profit Margin, Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE), Earnings Per Share (EPS), Current Ratio, Quick (aka acid-test) ratio, Debt Ratio, Times Interest Earned, Average Age of Inventory, and Average Collection Period.

2. Understand how the addition or reduction of debt influences the various ratios. That is, understand how the various ratios change based on a firm’s capital structure.

Capital Structure/Financial Leverage

1. What is capital structure? What is financial leverage?

2. How does the capital structure affect the cost of capital?

3. What does it mean, “. . . ability to service debt”? What is debt service? What portion of debt service is on the income statement?

4. What is an amortization table? With a fixed rate, amortized loan, does interest increase or decrease as the loan nears maturity? Explain.

5. What is a covenant? What are some common covenants?

6. What might happen if a company violates its covenants?

7. Different industries have different (average) capital structures. Why?

8. If a company does not have strong liquidity, is it a good candidate for issuing debt and retiring stock in equal amounts?

9. What does buying back bonds do to a company’s capital structure?

10. If a company is having liquidity problems, would you recommend buying back bonds without issuing more bonds or stock?

11. If a company is adjusting its capital structure by issuing more stock, what is the importance of the stock price?

12. Matching Assets with loan maturities: A company would like to finance inventory. What type of debt or loan would you recommend?

13. Matching Assets with loan maturities: A company would like to build a new warehouse. What type of debt or loan would you recommend? Approximately how long of an amortization period would you recommend?

14. How can a company increase (decrease) its financial leverage?

Financing Terms You Should Know

1. Line of Credit or Revolving Line of Credit

2.  Short Term Loan 

3.  Capital   

4.  Mortgage 

5.  Equipment/Vehicle Loans     

6.  Factoring 

7.  Angel Investor 

8.  Venture Capital 

9. Commercial Paper

10. Bond - Corporate

11. Preferred Stock

12. Common Stock

13. Initial Public Offering

14. Private Placement

15. Balloon Payment or Balloon Loan

16. Clean-Up Period

17. Interest Only Loan

18. Prime Rate

19. Variable Rate Loan   

20. Amortization

21. Principal

22. Personal Guarantee

23. Collateral

25. Loan-to-Value

26. Unsecured

27. Non-recourse loan

28. Covenant (or restrictive covenant)

29. Lien

30. Loan Amortization

31. Loan Amortization Schedule

32. Debt Service

33. Prime Rate

34. Guaranteed Loan

35. Loan-to-Value

36. Bond Indenture

37. Subordinated Debentures

38. Call Feature

39. Convertible Bond

40. Junk Bonds

41. Secured Bond

42. Leveraged Buyout (LBO)

43. Sinking-fund Requirement

44. Aging Schedule

Cash Budget

1. Understand a cash budget and its purpose.

Capital Budgeting

1. Be able to define Capital Budgeting. 

2. Be able to define and apply the three approaches to capital budgeting: Payback method, Net Present Value (NPV), and Internal Rate of Return (IRR).

3. Understand the spreadsheet used to determine whether you should invest in Project A or B in the FinGame simulation. That is, understand how a company might determine cash flows and how depreciation influences cash flows. 

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