Finance 320-031 Spring 2015 ’ ’ a)?
Midterm Exam #2
1. Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180
in her account so that she can earn interest on the $180 this year. The interest Jamie earns this yea
Finance 320-031 Spring 2015 1‘ yr; grit/2)
Midterm Exam #1 n v“ ‘ . .
1. Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt
and equity is referred to as the firm's:
) capital budget.
Net Present Value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a
projected investment or project.
NPV (Net Present Value) the $ difference between an investment an investments market value and its cost. NPV = PV inflows Cost.
Rule: Accept project if NPV > 0
Discount Cash Flow (DCF) valuation the process of valuing an investment by
discounting its futu
FlN 320 i
Chapter 7 Review
Stock Valuation & Equity Markets
A. Stock Valuation
The value of a stock is Present Value of the EXPECTED future cash
flows. Cash flow is made up of dividends realized and capital gains
realized on the sale of a stock (w
Finance 320 Chapter 8 Review
Chapter 8 focuses on Return on Investment and the various ways businesses make
1. The most widely accepted and used are Net Present Value (NPV) and Internal Rate
of Return (IRR). We typically use Excel in determinin
Chapter 10 Review
Return on Investment in Capital Markets
Calculating Return on Investment
What is the Dollar Return on our investment?
Total Dollar Return = Dividend + Capital Gain (or Loss)
Cash from Sale of Stock = Initial Investment + Total Return
FIN 320 Chapter 11 Review
Risk & Return
1. How do we determine Future Economic Returns?
-Historical Stock & Market Performance
-Company Guidance & Outlook
-Market News and Information
-Efficient Market Theory
-Determining Risk & Return Probabilities
FIN 320 Chapter 9 Review
Important Concepts in Chapter 9
-What Are We Measuring When Considering a Project? We are measuring the
NPV of Cash Flows as they occur, after tax.
-Relevant Cash Flows: Those Cash Flows that impact the company as a result of
1. A firm has net working capital of $3,800 and current assets of
$11,700. What is the current ratio?
a. Current ratio = CA/CL
CL is unknown, but NWC = CA-CL or CL = CA-NWC = 11,7003,800 = 7,900
Current ratio = $11,700/$7,900 = 1.48
2. A firm has cash of$
1. If you are in charge of all fixed asset purchases, it means that you
are in charge of:
o Capital budgeting
2. Suppose a firm is financed with 40 percent debt and 60 percent
equity. This mixture of debt and equity is referred to as the firm's:
The Goal of the Firm: Maximization of shareholder wealth to be the goal of the firm, by which we mean
maximization of the total market value of the firms common stock.
II. Five Principles That Form the Foundations of Finance
A. Principle 1: C
Discount rate may be difficult to calculate
Cash flows may be easier to estimate
NPV may be calculated with a wide range
of possible discount rates
NPV Profile is a graph of possible NPVs (YAxis