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Exam 1 Review Guide

The document provides a review guide for a midterm exam covering 14 chapters. It includes: 1) Key topics like the primary goal of business, enterprise vs shareholder value, business entities, claims against corporations, financial markets and institutions. 2) Models like CAPM, calculating beta, security market line, risk premiums, factors influencing cost of equity. 3) Portfolio concepts such as diversification, standalone vs portfolio risk, covariance and the risk/return relationship. 4) Valuation methods for bonds, common stock including DCF, dividend yield, P/E ratio, cash flows and using CAPM for common stock valuation.

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Kayla Shelton
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177 views

Exam 1 Review Guide

The document provides a review guide for a midterm exam covering 14 chapters. It includes: 1) Key topics like the primary goal of business, enterprise vs shareholder value, business entities, claims against corporations, financial markets and institutions. 2) Models like CAPM, calculating beta, security market line, risk premiums, factors influencing cost of equity. 3) Portfolio concepts such as diversification, standalone vs portfolio risk, covariance and the risk/return relationship. 4) Valuation methods for bonds, common stock including DCF, dividend yield, P/E ratio, cash flows and using CAPM for common stock valuation.

Uploaded by

Kayla Shelton
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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FIRE 312Mid Term Review Guide:

Chapter 1:
1) Primary goal of a business
A fundamental assumption underlies the theory of financial
management: Management has one basic, overriding goalto create
value for stockholders.
2) Value of business enterprises Key Financial metric which drives value
vs manner in which businesses achieve that metric.

3) Distinguish between Enterprise Value & Shareholder Value

4) Features of business entities


a. Proprietorship
b. Partnership (General vs Limited)
c. Professional Partnership
d. LLC
e. Corporation (S Corporation vs C Corporation

5) Types of claims against CorporationsTheir cost relative to the cost of


CS:
a. Senior Debt
b. Junior Debt
c. Preferred Stock
d. Common Stock
e. Hybrids
6) Financial Markets Private vs Public, Exchanges vs Over the Counter,
Physical vs Virtual
7) Financial Institutions Be able to describe major US Financial
Institutions Types
1) Be able to give a concise description of the Capital Asset Pricing Model
(CAPM)
2) Be able to discuss the methods of calculating Beta.

3) Be able to explain the Security Market Line Concept.


4) Be able to calculate risk premiums for a stock, given its Beta & the Market
Risk Premium.
5) Be able to explain the influence of interest rate changes & changes in risk
aversion on the Security Market Line.
6) Be able to define the return on an equity security (Common Stock) for a 1
year holding period.
7) Be able to explain why models explaining investor behavior are relevant in
determining cost of capital for corporations.
8) Be able to explain why determining the cost of equity capital is so critical in
Corporate Finance.
9) Explain the process of portfolio diversification. What are the statistical
characteristics of a well-diversified portfolio?
10)
Be able to discuss the differences between standalone risk & portfolio
risk.
What are the basic ways of measuring standalone risk & contribution to
portfolio risk for an individual investment opportunity.
11)

Why are co-variances important in evaluating investment risk?

12)
Be able to explain the intuition behind the risk/return relationship. How
is the risk/return relationship important in financial decision making &
financial analysis?
13)
What are the factors which ultimately determine the intrinsic & long
term market value of a corporation?
14)
What two metrics should corporations focus on to maximize long term
value?

1) Be able to describe the Dividend Yield + Growth Rate or DCF approach to


estimating cost of equity capital.
2) Be able to set up the equations for basic time value of money questions,
including bond valuation.
3) Be able to identify the most common source of growth capital for mature
corporations.
4) Be able to discuss the methodologies used to value bonds & to choose the
proper discount rate for valuation (ie, yield curves to take account of
maturity risk, corporate yield curves) & how call options & conversion
options are accounted for in the valuation process.

5) Be able to discuss & use the basic common stock valuation methods
dividend discount, dividend plus growth, price earnings ratio method & cash
flow based methods.
6) Be able how CAPM can be used in common stock valuation.

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