Special Saturday Session: Midterm Review Session

Special Saturday Session:Midterm Review Session Corporate Finance (GSBA 548) J. K. Dietrich, March 31, 2007

Midterm Examination • Material through class of March 28 (LA) or March 27 (OCC) • Includes text chapters 1, 2, 3, 4, 5, 7, 14, and 20, and other assigned readings • Covers material contained in assigned end-of-chapter problems and Part 1 of group project • Questions will come from • End-of-chapter problems • Class objectives and vocabulary • Group project concepts and calculations

Major Focus of Midterm • Material in lectures and text concerned with topics in chapters 4, 5, and 7 • Basic finance principles discussed so far: • Goal is to maximize shareholders’ wealth • Corporate governance developed to achieve goal • Wealth is the present value of consumption and wealth is increased with positive NPV projects • Value is the present value of cash flows at the risk adjusted discount rate • Cash, time, risk determine value

Principles and Techniques • Six present value formulas are techniques needed to estimate values and accounting for timing • Applications of simple present value formulas are used as techniques to value fixed-income securities since cash flows are contractually specified • Stock (equity, share) values do not have fixed cash flow patterns but formulas useful in studying stock values and P-E ratios

Estimating Future Cash Flows • A financial decision to invest is analyzed in terms of its impact on incremental cash flows • Revenues, costs, taxes, working capital, and capital expenditures are the important elements of cash flows for business decisions • Revenue and operating assumptions are necessary to estimate each of these elements

Text, Lectures, and Project • Basic finance principles are the focus of the text assignments and problems • Class discussion illustrates basic finance principles with Wall Street Journal data, stories, and group project • In class, we have stressed corporate governance and book and market values (Chapter 1), real-life examples of corporate debt (Chapter 5), and cash flows from investments (Chapter 7)

Topics Not Covered in Readings • Bond prices in NASD Bondinfo and from other sources like Wall Street Journal • Debt details in notes to financial statements • Constant principle-payment loan formula • Investment decision rules like payback period, average accounting return (both bad), internal rate of return (problematic) • Capital budgeting and profitability index • All these are discussed on class slides

Suggestions for Midterm Review • Review course syllabus, weekly class objectives (with vocabulary) • Memorize present value formulas and identify their use in present value problems and evaluation fixed incomes • Review class slides • Know your group project Sheet 1 results and understand why book and market values differ • Understand Baldwin and similar examples

Special Saturday Session: Midterm Review Session

Special Saturday Session: Midterm Review Session

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