Preparing for the mid-

term_Finance I
 Unit 1: Earnings and cash flow
analysis
What the unit is all about:
Introduction to financial management, What financial managers
do, Understanding cash flow, Ratio analysis

Theory:
1. Explain capital budgeting, capital structure, working capital
management and dividend decisions as the key decisions in
financial management.
2. What is the goal of a corporation? Why is shareholder’s
wealth maximization a better goal than profit maximization?
3. Explain agency problem and agency cost.
4. Explain the job of the CFO, treasurer and controller.
5. Cash flow from a business might differ from profits. Explain
why.
Unit 1: Earnings and cash flow
analysis….
6. Explain the concept of free cash flow (FCF). Are
FCFs really free?
7. Use the Du Pont identity to explain the three ways
in which a firm can improve its ROE.
8. What are the uses and limitations of ratio analysis?

Numerical:
9. Calculate NOPAT, OCF and FCF
10. Calculate and interpret the various liquidity, asset
management, leverage, profitability and market
value ratios.
11. Du Pont identity
Unit 2: Time value of money
What the unit is all about: Understanding time value
of money and compound interest – the cornerstones of
finance
Theory:
1. How does PV of a cash flow vary with changes in
discount rate (r) and time (t)?
2. How does FV of a cash flow vary with changes in
discount rate (r) and time (t)?
3. Which has a higher value – a dollar today or a dollar a
year from now? Why?
4. Briefly explain the rule of 72 in finance
5. How do nominal and real cash flows differ?
6. How do nominal and real interest rates differ?
Unit 2: Time value of
money….
Numerical:
1. Calculate PV or FV of a cash flow/stream of cash
flows
2. Calculate PV or FV of an annuity or annuity due
3. Calculate ‘r’ or ‘n’ of a cash flow or annuity
4. Construct a loan amortization table
5. Calculate and interpret real or nominal cash flow
6. Calculate and interpret real or nominal interest
rate
7. Calculate and interpret periodic rate or APR or
EAR
 Unit 2 - Practice questions
1. Suppose that you will receive annual payments of $100,000 for a
period of 10 years. The first payment will be made 4 years from now. If
the interest rate is 5%, what is the present value of this stream of
payments?
2. Shankar Lamichhane received ‘Madan Puraskaar’ - the most
prestigious award in Nepali literature - for his book ‘Abstract chintan
pyaaz’in the year 2024 B.S. The cash prize for ‘Madan Puraskaar’ in
2024 B.S. was Rs. 4,000. Amar Neupane was awarded the ‘Madan
Puraskaar’ in the year 2069 B.S. with a cash prize of Rs. 200,000. If
the rate of inflation averaged 9.5% from 2024 B.S. to 2069 B.S.,
calculate real value of the cash prize awarded to Amar Neupane at the
price level of 2024 B.S. to determine who got the higher cash award.
3. Hemingway Commercial Bank pays 6% interest compounded
semiannually on savings deposits. Fitzgerald Commercial Bank also
pays 6% interest on savings deposits but the interest is compounded
every month. Calculate the effective annual rate (EAR) offered by
each bank. Why must you be able to say which bank offers a higher
EAR even without any calculation?
Unit 2 - Practice questions….
4. Would you rather receive Rs 1,000 a year for 10 years
or Rs 800 a year for 15 years if the interest rate is 10
percent?
5. A store offers two payment plans. Under the instalment
plan, you pay 25 percent down and 25 percent of the
purchase price in each of the next three years. If you
pay the entire bill immediately, you can take a 10
percent discount from the purchase price. Which is a
better deal if you can borrow or lend funds at a 5
percent interest rate?
 Unit 3: Valuing bonds
What the unit is all about: Understanding bonds, their
valuation technique and calculating bond yields

Theory:
1. Explain the following: coupon, face value, maturity YTM
2. What is the relationship between bond price and YTM?
3. How do prices of a par, discount and premium bond vary with time?
4. How does current yield differ from YTM?
5. What is the interest rate risk in bonds and how does it vary in longer
vs. shorter maturity bonds and higher vs. lower coupon bonds?
6. What is a yield curve?
7. What is default risk in bonds and what is the role of credit rating
agencies?
8. Briefly explain zero coupon bonds, floating rate bonds and
convertible bonds
Unit 3: Valuing bonds….
Numerical:
1. Calculate bond price
2. Calculate YTM
3. Calculate current yield
4. Calculate Rate of return
5. Calculate YTC
6. Calculate expected (as opposed to promised) yield
7. Calculate price and YTM for zero coupon bonds
 Unit 3 – Practice questions
1. Glazer Company has a 12% coupon bond outstanding that has
10 years to maturity. The face value of the bond is $1,000. If
the yield (YTM) for similar bonds in the market is 14%, what is
the bond's current market price? Logically explain what would
happen to the bond price if YTM in the market fell to 10%? Why?
2. A 30 - year treasury bond is issued with face value of $ 1,000
paying interest of $60 per year. If market yields increase shortly
after the T- bond is issued, what happens to the bonds: (a)
Coupon rate (b) Price (c) Yield to maturity (d) Current Yield?
Explain in brief.
3. If a 10- year bond with face value of $ 1000 and a coupon rate
of 8 percent is selling at a price of $ 970 what is the bond's yield
to maturity? What about the current yield?
4. A 2-year maturity bond with face value $1000 makes annual
coupon payments of $80 and is selling at face value. What will
be the rate of return on the bond if its yield to maturity at the
end of the year is 6%?
Unit 4: Valuing stocks
What the unit is all about: Understanding key
concepts concerning stocks, their valuation and
their markets
Theory:
1. Explain primary & secondary market, IPO&
seasoned issue, stock market index
2. How do growth stocks differ from income stocks?
3. What is PVGO?
4. How do high P/E and low P/E stocks differ?
5. Explain the efficient market theory and the
different forms of stock market efficiency.
Unit 4: Valuing stocks….
Numerical:
1. Calculate stock price using: Book value
method and Liquidation value method
2. Calculate stock price using Dividend Discount
Model: zero growth rate, constant growth rate
and non-constant growth rate
3. Calculate dividend yield, capital gains yield
and expected return of a stock
4. Calculate growth rate (g) and PVGO
5. Calculate stock price using the P/E ratio
method
 Unit 4 – Practice questions
1. Compute the price of following stocks:
i. HD Company’s dividend per share is Rs.12 and is
expected to remain at Rs.12 for the foreseeable
future. Investors require 14 percent annual rate
of return.
ii. Hyundai Motor Company paid Rs.20 dividend last
year. At a constant growth rate of 6%. Investors
require a 16 percent rate of return.
i. ACE Inc.’s common stock is expected to pay Rs.12
dividends next year, and the market price is
projected to be Rs.264 by year end. Investor’s
required rate of return is 15 percent
2. Amazon.com’s year end dividend is $10, its current
market price is $100 and the growth rate in its
Unit 5: Introduction to the concept
of risk
What the unit is all about:
Understanding key concepts concerning risk, return and their
measures
Theory:
1. What is diversification and how does it reduce risk?
2. Explain the role of correlation in diversification.
3. What is more relevant - asset or Portfolio risk? Why?
4. How do systematic and unsystematic risks differ?
5. Explain the concept of beta?
6. Explain aggressive and defensive stocks.
7. Explain the CAPM and SML.
8. How might project risk differ from that of the
company?
Unit 5: Introduction to the concept
of risk….
Numerical:
1. Calculate arithmetic mean, geometric mean, percentage and
holding period return
2. Calculate expected return and standard deviation of a
stock/asset
3. Calculate expected return and variance of a portfolio
4. Calculate and interpret covariance and correlation between two
stocks/assets
5. Calculate expected return and standard deviation of a portfolio
6. Calculate and interpret beta of a stock
7. Calculate and interpret beta of a portfolio
8. Calculate expected return using CAPM and compare this with
actual return to judge the stock as overpriced or underpriced
9. Segregate risk of an asset into systematic and unsystematic risk
Unit 5 – Practice questions
1. If the risk-free rate is 6% and the expected rate of
return on the market portfolio is 14%, is a security
with a beta of 1.25 and an expected rate of return
of 16% overpriced or underpriced?