BUS 350 Principles of Finance
EXAM 2 (Due Tuesday 11/22/11)
FALL 2011
Name: _
ID:
_
Instruction:
Submit your own copy. Working with your cohorts is highly recommended.
Question #1
You are working for an investment bank, which is negotiating a deal for a m
Making Capital Investment Decision
Continue Chapter 9
Evaluating NPV Estimates
NPV estimates are just that estimates !
A positive NPV is a good start now we
need to take a closer look
Forecasting risk how sensitive is our
NPV to changes in the cash flow
Arithmetic vs. Geometric
Chapter 10 (continued)
Mean
Arithmetic average return earned in an
average period over multiple periods
Arithmetic average, RA = (R1 + R2 + + RT) / T
Geometric average the average
compound return per period over multiple
periods
Principles of Finance 350
Lectures 404 and 405
Richard D. Marcus
University of Wisconsin
Milwaukee, Lubar
School of Business
Fall 2014
marcus@uwm.edu
Put Finance 350 in
the subject matter of
emails please.
Office: LUB S430F
Phone: 229-4103
Four Basic
Capital Budgeting and Capital Rationing
Issues
Advantages of IRR
Knowing the IRR is intuitively appealing
It is a simple way to communicate the value of a
project to someone who doesnt know all the
estimation details
Not dependent on the size of the pr
Vol 3, No. 1,
Spring 2011
Page 43~60
Hands in the Cookie Jar?
The Case of Management Buyouts1
Kai Chen,a
Yong-Cheol Kim,b
Richard D. Marcus,b
a. Tillman School of Business, Mount Olive College, Mount Olive, NC 28365
b. Lubar School of Business, University
Chapter 3 continued
The DuPont Identity
ROE = NI / TE
ROE = PM * TAT * EM
PM
TAT
EM
= Basic Formula
= DuPont Identity
= Net Income / Sales
= Sales / Total Assets
= Total Assets / Total Equity
NI Sales TA NI
ROE
Sales TA TE TE
Profit Margin
Ass
Financial Statements, Taxes,
and Cash Flows
Chapter 2 continued
Publicly traded companies must file regular reports
with the Securities and Exchange Commission
(SEC).
These reports are usually filed electronically and
can be searched at the SEC public s
Continue Chapter 7 on Stocks
Using the DGM to Find R
Start with the DGM:
D0 (1 g)
D1
P0
R -g
R -g
rearrange to solve for R
D0 (1 g)
D1
R
g g
P0
P0
Div Yield + Growth Rate = Div Yld + Capital Gain Yld
1
Finding g
Dividends over the past five years, supp
Bond Features, Types, and Yield
Curves
The Bond Chapter 6 Continued
Indenture
Contract between the company and the
bondholders (A Deed of Trust)
The basic terms of the bonds
The total amount of bonds issued
A description of property used as security,
Discounted Cash Flow
Valuation
Chapter 5
5. Future Value with Multiple Cash Flows
CF of $2,000 at the end of each year for five years. Using a 10% rate
of interest, what will this cash flow be worth at the end of year 5?
Ans: Using our FV formula, find th
BUS 350 Final Exam Review
(Chapters 11-14)
Chapter 11
1) You own the following portfolio of stocks. What is the weight of each stock?
What is the expected return of the entire portfolio?
Stock
Price
A
Number of
shares
50
$20
Expected
Return
15%
B
130
$45
Leverage and
Capital Structure
Chapter 13
Capital restructuring involves changing the
amount of leverage a firm has without changing
the firms underlying assets
Q: Can using more debt or more equity influence
firm value, holding firm assets constant?
Th
BUS 350 Final Exam Review
(Chapters 11-14)
Chapter 11
1) You own the following portfolio of stocks. What is the weight of each stock? What
is the expected return of the entire portfolio?
Stock
Price
A
Number of
shares
50
$20
Expected
Return
15%
B
130
$45
An Optimal
Capital Structure?
Chapter 13 continued from Tuesday last week
Case I Last class assumes
No corporate or personal taxes
No bankruptcy costs
Case II Assumes
Corporate taxes, but no personal taxes
No bankruptcy costs
Case III Assumes
Corp
Internal and Sustainable Growth Rates in the
Presence of Scale Economies
Richard D. Marcus, Ph.D.
Associate Professor of Finance
Lubar School of Business
University of Wisconsin Milwaukee
Lubar Hall Room S430F
3202 N. Maryland Rd.
Milwaukee, WI 53217
Phon
Proofs for the Internal and Sustainable Growth Formulasi
Internal Growth Rate proof when there is no External Financing Needed (EFN),
meaning we use only internal funds to grow. It is typically viewed as the increase in
assets matches the increase in sale
350 Final in Principles of
Finance
Se/Lc
404
405
Date
Dec13
Dec 13
Day
Sat.
Sat.
Time
7:30-9:30am
7:30-9:30am
Enrolled Room and Capacity
127
LAP N103 Last Name A through R (98)
LAP N101 Last Name S through Z (29)
173
LAP 162 all in Lecture 405
afternoon l
The Cost of Capital
Chapter 12
We know that the return earned
on assets depends on the risk of
those assets
The return to an investor is the
same as the cost to the
company
Our cost of capital provides us
with an indication of how the
market views the
Midterm 1 Review Sheet
BUS ADM 350: Principles of Finance
Chapter 1: Introduction to Financial Management
A.
Business Finance three main areas of concern:
- Capital Budgeting
- Capital Structure
- Working Capital Management
B.
Goal of financial management
Midterm 1 Review Sheet: SOLUTIONS
BUS ADM 350: Principles of Finance
Chapter 1: Introduction to Financial Management
A.
Business Finance three main areas of concern:
- Capital Budgeting
- Capital Structure
- Working Capital Management
B.
Goal of financial
Risk and Return
Chapter 11
Expected returns are based on the
probabilities of possible outcomes
In this context, expected means average if
the process is repeated many times.
Pay $1 for a bet, then flip a coin.
Win $2 if heads; $0 if tails.
The expected r
Interest Rates and Bond Valuation
Objectives:
Chapter 6
Know the important bond features and bond types
Understand bond values and why they fluctuate
And next week we finish Chapter 6 on:
Understand bond ratings and what they mean
Understand the impa
Giving the following income statement, what is the amount of operation cash flow ?
Income Statement
Net Sales
$142,600
Costs
123,700
Depreciation
13,700
EBIT
5,200
Interest
2,900
Taxable income
2,300
Taxes
400
Net Income
$ 1,900
Solution:
OCP=EBIT + Depre
Principles of Finance
Bus Adm 350,
Homework 4 (Solution)
Question 1
Bee Ware Company is presented with the following two mutually exclusive projects. The
required return for both projects is 17.5 percent.
Yea
r
0
Project M
Project N
-$191,492 -$278,559
1
Principles of Finance
Bus Adm 350,
Instructor: Ujjal Chatterjee
Name:
_
ID:
_
Homework 4 (Due in Class)
Instructions:
Details need to be shown as you solve each question.
Round your results to 2 decimal places.
Question 1
Bee Ware Company is presented wit
Principles of Finance
Bus Adm 350, Oct 13, 2011
Instructor: Ujjal Chatterjee
Name:
_
ID:
_
Homework 3 (Due: Oct 20, 2011)
Instructions:
Details need to be shown as you solve each question for partial grading.
Round your results to 2 decimal places.
Questi
Principles of Finance
Bus Adm 350, Oct 13, 2011
Instructor: Ujjal Chatterjee
Name:
_
ID:
_
Homework 3 (Due: Oct 20, 2011)
Instructions:
Details need to be shown as you solve each question for partial grading.
Round your results to 2 decimal places.
Questi