WorkfileContents.doc
1
Practice Final D
1.
If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely?
a. Accepting poor low risk projects.
b. Rejecting good high risk projects.
c. Both A and B.
d. Neithe
Chapter 19
Multinational Financial
Management
Multinational vs. Domestic
Financial Management
Exchange Rates and Trading in
Foreign Exchange
International Money and Capital
Markets
191
What is a multinational
corporation?
A corporation that
operates in
Page 50
Problem 26A
Statement of Cash Flows
Cash Flows From Operating Activities
Net Income
Dep Exp
Int Exp
AR
INV
Prepd rent
AP
Accruals
+
+
+
+
+
+

42,900
30,000
10,000
9,000
33,000
100
9,000
1,000
Total CF Op.
+ 67,000
Cash Flows From Investmen
FIN3350 EXAM III
SPRING 2007
DR. ROLAND
1.
Suppose the real riskfree rate is 2.50% and the future rate of inflation is expected to be constant at 3.05% each year. What rate of return
would you expect on a 5year Treasury security, assuming the pure expec
DUPONT FORMULA ANALYSIS
AND BOOK VALUE RATIOS
(ratio definitions may vary always use benchmark definition for comparative purposes)
ROE =
Net Income available to CS
Common Equity
(return on
equity)
NI = net income available to CS
CE =common equity = par +
INTERPRETATION OF FINANCIAL RATIOS
FIN3350
Ratio Analysis
Current
Quick
Inventory Turnover
Days Sales Outstanding
2003
2.3
0.8
4.8
37.4
Fixed Assets Turnover
10.0
Total Assets Turnover
2.3
Debt Ratio
TIE
EBITDA Coverage
Profit Margin
Basic Earning Power
R
FUTURE VALUE (FV) OF AN UNEVEN CF
WHERE # COMPOUNDING PERIODS PER YEAR ON INTEREST RATE = # CFs PER YEAR
EXAMPLES
FINDING THE ANSWER USING THE
FORMULA
(always use decimals)
FINDING THE ANSWER
USING THE CALCULATOR
(always use percents)
10% NAR, annual cmpd
TRUE INTRINSIC VALUE
OSI PHARMACEUTICALS INC.
TICKER: OSIP
Two major investments:
(1) Macugen, drug which slows vision
loss related to macular
degeneration
(2) Tarceva, drug to treat lung cancer
OBSERVED MARKET VALUE
THE IDEAL
THE REALITY
P0 =
P0 (WSJ)
us
FIN3350
MARKET VALUE RATIOS
PRICE / EARNINGS RATIO
STOCK PRICE PER SHARE
EARNINGS PER SHARE
AKA: P / E RATIO
Earnings per share = EPS = NI available to CS / # shares outstanding
PRICE / CASH FLOW
RATIO
PRICE PER SHARE
CASH FLOW PER SHARE
Net Cash Flow = (
Primary Goal of the Firm:
Maximize the wealth of the common stockholders.
In a publicly traded firm:
Maximize the wealth of the common stockholders
equals
Maximize the price of common stock
Two Rs in Finance:
RISK
RETURN
Use only common stock price as wea
FIN3350
RETIREMENT PRACTICE PROBLEM
You are to plan for your eventual retirement. Ignore any governmental assistance, i.e., you cannot include social
security. You must create your own wealth. Your plan should address all of the following issues:
(1)
(2)
PRESENT VALUE (PV) OF AN ANNUITY
WHERE # OF CFs PER YEAR = # OF COMPOUNDING PERIODS ON INTEREST RATE
EXAMPLES
1
2

100
100
FINDING THE ANSWER USING THE
FORMULA
(always use decimals)
PV($100 t=2) t=0 = 100 (1 + 0.10)2 = $ 82.64
PV($100 t=1) t=0 = 100 (1
FIN3350
RETIREMENT PRACTICE PROBLEM
You are to plan for your eventual retirement. Ignore any governmental assistance, i.e., you cannot include social
security. You must create your own wealth. Your plan should address all of the following issues:
(1)
(2)
PRESENT VALUE (PV) OF ANNUITIES AND UNEVEN CFs
WHERE # COMPOUNDING PERIODS PER YEAR ON INTEREST RATE # CFs PER YEAR
EXAMPLES
FINDING THE ANSWER USING THE
FORMULA
(always use decimals)
Step 1: Interest Rate Conversion
1
2

100
100
1 + ( NAR P/YR )
P/Y
Individual Marginal Tax Rates
If Income
is Over
But not
The Tax Rate is:
Over
$0
$7,300
10% of the amount over $0
$7,300
$29,700
$730 plus 15% of the amount over $7,300
$29,700
$71,950
$4,090.00 plus 25% of the amount over
$29,700
$71,950
$150,150
$14,6
Chapter 6
Interest Rates
Cost of Money and Interest Rate
Levels
Determinants of Interest Rates
The Term Structure and Yield
Curves
Using Yield Curve to Estimate
Future Interest Rates
61
What four factors affect the level
of interest rates?
Production
opp
Chapter 7
Bonds and Their
Valuation
Key Features of Bonds
Bond Valuation
Measuring Yield
Assessing Risk
71
What is a bond?
A longterm debt instrument in which a
borrower agrees to make payments of
principal and interest, on specific dates,
to the ho
Chapter 8
Risk and Rates of Return
StandAlone Risk
Portfolio Risk
Risk and Return: CAPM/SML
81
Investment Returns
The rate of return on an investment can
be calculated as follows:
Expected
endingvalue
Return
Cost
Cost
For example, if $1,000 is invest
Chapter 8
Risk and Rates of Return
StandAlone Risk
Portfolio Risk
Risk and Return: CAPM/SML
81
What is investment risk?
Two types of investment risk
Standalone risk
Portfolio risk
Investment risk is related to the
probability of earning a low or n
Chapter 9
Stocks and Their
Valuation
Features of Common Stock
Determining Common Stock
Values
Preferred Stock
91
Facts about Common Stock
Represents ownership
Ownership implies control
Stockholders elect directors
Directors elect management
Managements
Chapter 10
The Cost of Capital
Sources of Capital
Component Costs
WACC
Adjusting for Flotation Costs
Adjusting for Risk
101
What sources of longterm capital
do firms use?
102
Calculating the Weighted Average
Cost of Capital
WACC = wdrd(1 T) + wprp
Chapter 11
The Basics of Capital
Budgeting
Should
we
build
this
plant?
111
What is capital budgeting?
Analysis of potential additions to fixed
assets.
Longterm decisions; involve large
expenditures.
Very important to firms future.
112
Steps to Capital
Chapter 12
Cash Flow Estimation
and Risk Analysis
Relevant Cash Flows
Incorporating Inflation
Types of Risk
Risk Analysis
121
Proposed Project
Total depreciable cost
Equipment: $200,000
Shipping and installation: $40,000
Changes in working capital
Chapter 14
Capital Structure and
Leverage
Business vs. Financial Risk
Optimal Capital Structure
Operating Leverage
Capital Structure Theory
141
What is business risk?
Uncertainty about future operating income
(EBIT), i.e., how well can we predict
ope
Chapter 13
Real Options and Other
Topics in Capital
Budgeting
Identifying Embedded Options
Valuing Real Options in Projects
131
What is real option analysis?
Real options exist when managers
can influence the size and riskiness
of a projects cash flows
Chapter 15
Distributions to
Shareholders
Investor Preferences on Dividends
Signaling Effects
Residual Dividend Model
Dividend Reinvestment Plans
Stock Repurchases
Stock Dividends and Stock Splits
151
What is dividend policy?
The decision to pay out