Finna 3332 Exam 1

Finance

Study of how money is managed, invested, borrowed, and allocated over time. | Formula/Calculator: Big idea: value today vs value tomorrow. | Memory cue: Finance = decisions about money over time. | Priority: High

Corporate Finance

Financial decisions made by businesses to maximize firm value. | Formula/Calculator: Focus: investment, financing, and dividend decisions. | Memory cue: How a company chooses projects and funding. | Priority: High

Financial Manager

Person responsible for major financial decisions: budgeting, financing, cash management, and risk decisions. | Formula/Calculator: Goal: increase value of the firm. | Memory cue: The person deciding where money should go. | Priority: High

Capital Budgeting

Process of deciding which long-term projects or assets a firm should invest in. | Formula/Calculator: Uses NPV, IRR, payback later in course. | Memory cue: Should we buy the machine or open a new branch? | Priority: High

Capital Structure

Mix of debt and equity a firm uses to finance operations and growth. | Formula/Calculator: Debt + Equity = financing sources. | Memory cue: How much borrowed money vs owner money? | Priority: Medium

Working Capital Management

Managing short-term assets and liabilities, such as cash, inventory, receivables, and payables. | Formula/Calculator: Current assets - current liabilities = net working capital. | Memory cue: Day-to-day money management. | Priority: Medium

Maximize Firm Value

Primary goal of financial management: make decisions that increase the value of the firm. | Formula/Calculator: Usually measured by stock price for public companies. | Memory cue: Not just profit; long-term value. | Priority: High

Shareholder Wealth Maximization

Making decisions that increase the wealth of the owners of the company. | Formula/Calculator: Closely linked to stock price. | Memory cue: Owners benefit when firm value rises. | Priority: High

Sole Proprietorship

Business owned by one person, easy to start, but owner has unlimited liability. | Formula/Calculator: Owner and business are legally connected. | Memory cue: Simple but risky for the owner. | Priority: Medium

Partnership

Business owned by two or more people; partners may share profits, losses, and liability. | Formula/Calculator: General partners may have unlimited liability. | Memory cue: Two people opening a business together. | Priority: Medium

Corporation

Legal entity separate from its owners; can raise capital by selling stock. | Formula/Calculator: Limited liability for shareholders. | Memory cue: The business is legally separate from owners. | Priority: High

Limited Liability

Owners are generally not personally responsible for business debts beyond their investment. | Formula/Calculator: Key feature of corporations. | Memory cue: You can lose investment, not usually personal assets. | Priority: Medium

Agency Problem

Conflict of interest between managers and owners/shareholders. | Formula/Calculator: Managers may act in their own interest. | Memory cue: Manager spends company money for personal benefit. | Priority: High

Agency Costs

Costs created by conflicts between managers and owners, including monitoring and incentives. | Formula/Calculator: Examples: audits, compensation plans. | Memory cue: Cost of making sure managers act for owners. | Priority: Medium

Financial Markets

Markets where people and firms trade financial assets such as stocks and bonds. | Formula/Calculator: Help move funds from savers to borrowers. | Memory cue: Where capital is raised and traded. | Priority: Medium

Primary Market

Market where new securities are sold for the first time. | Formula/Calculator: Company receives money from sale. | Memory cue: IPO or new bond issue. | Priority: Medium

Secondary Market

Market where existing securities are traded between investors. | Formula/Calculator: Company usually does not receive money. | Memory cue: NYSE trading after IPO. | Priority: Medium

Debt

Borrowed money that must be repaid, usually with interest. | Formula/Calculator: Example: loans, bonds. | Memory cue: Company owes money. | Priority: Medium

Equity

Ownership interest in a company. | Formula/Calculator: Example: common stock. | Memory cue: Investors own a piece of the firm. | Priority: Medium

Risk-Return Tradeoff

Higher expected returns usually require taking higher risk. | Formula/Calculator: No free lunch in finance. | Memory cue: Safer investments usually pay less. | Priority: High

Time Value of Money (TVM)

Money today is worth more than the same amount in the future because it can earn interest. | Formula/Calculator: Core idea behind PV and FV. | Memory cue: $100 today can grow if invested. | Priority: High

Present Value (PV)

What a future cash flow is worth today. | Formula/Calculator: PV = FV / (1 + r)^n | Memory cue: Discount future money back to today. | Priority: High

Future Value (FV)

What money today will grow to in the future. | Formula/Calculator: FV = PV × (1 + r)^n | Memory cue: Compound today’s money forward. | Priority: High

Interest Rate (r or I/Y)

Rate used to compound or discount cash flows. | Formula/Calculator: On BAII+: I/Y key. | Memory cue: The growth or discount rate. | Priority: High

Number of Periods (n or N)

Number of compounding periods. | Formula/Calculator: On BAII+: N key. | Memory cue: Years, months, or periods. | Priority: High

Compounding

Process of earning interest on both principal and prior interest. | Formula/Calculator: Moves money forward in time. | Memory cue: Interest on interest. | Priority: High

Discounting

Process of finding the present value of future cash flows. | Formula/Calculator: Moves money backward in time. | Memory cue: What is future money worth today? | Priority: High

Simple Interest

Interest earned only on the original principal. | Formula/Calculator: Interest = Principal × rate × time. | Memory cue: No interest on prior interest. | Priority: Low

Compound Interest

Interest earned on principal plus accumulated interest. | Formula/Calculator: FV = PV × (1 + r)^n | Memory cue: Interest on interest. | Priority: High

Cash Flow Timeline

Visual line showing when cash inflows and outflows occur. | Formula/Calculator: Time 0 = today. | Memory cue: Draw timeline before calculator. | Priority: High

Lump Sum

A single cash flow occurring at one point in time. | Formula/Calculator: Use basic PV/FV formulas. | Memory cue: One deposit or one payment. | Priority: High

Ordinary Annuity

Equal payments made at the end of each period. | Formula/Calculator: BAII+ usually in END mode. | Memory cue: Most loans and investments assume END. | Priority: High

Annuity Due

Equal payments made at the beginning of each period. | Formula/Calculator: Set BAII+ to BGN mode if needed. | Memory cue: Rent paid at the start of the month. | Priority: Medium

Payment (PMT)

Equal periodic cash flow in an annuity. | Formula/Calculator: On BAII+: PMT key. | Memory cue: Monthly loan payment or yearly deposit. | Priority: High

Perpetuity

Equal cash flows that continue forever. | Formula/Calculator: PV = PMT / r | Memory cue: A never-ending payment stream. | Priority: Medium

Growing Perpetuity

Cash flows grow at a constant rate forever. | Formula/Calculator: PV = C1 / (r - g) | Memory cue: Used later in stock valuation. | Priority: Medium

Uneven Cash Flows

Cash flows that are not equal each period. | Formula/Calculator: Use CF worksheet or discount each separately. | Memory cue: Different payments each year. | Priority: High

Cash Flow Additivity

Value of multiple cash flows equals the sum of each cash flow’s present value. | Formula/Calculator: PV total = PV1 + PV2 + PV3… | Memory cue: Discount separately, then add. | Priority: High

Opportunity Cost of Capital

Return you give up by choosing one investment over another with similar risk. | Formula/Calculator: Used as discount rate. | Memory cue: What else could your money earn? | Priority: Medium

Required Return

Minimum return investors require for taking risk. | Formula/Calculator: Often used as discount rate. | Memory cue: The return needed to accept investment. | Priority: Medium

BAII+ CLR TVM

Clears old TVM entries before starting a new problem. | Formula/Calculator: Press 2nd + CLR TVM. | Memory cue: Do this before every problem. | Priority: High

BAII+ END Mode

Assumes payments occur at the end of each period. | Formula/Calculator: Most finance problems use END mode. | Memory cue: Default for ordinary annuity. | Priority: High

BAII+ BGN Mode

Assumes payments occur at the beginning of each period. | Formula/Calculator: Use only for annuity due. | Memory cue: If screen says BGN, be careful. | Priority: Medium

Sign Convention

Cash inflows and outflows must have opposite signs on calculator. | Formula/Calculator: Example: PV negative, FV positive. | Memory cue: Money paid out is negative. | Priority: High

Solving for FV

Find what today’s money becomes later. | Formula/Calculator: Enter N, I/Y, PV, PMT if any; CPT FV. | Memory cue: Savings growth problem. | Priority: High

Solving for PV

Find what future money is worth today. | Formula/Calculator: Enter N, I/Y, PMT/FV; CPT PV. | Memory cue: Discount future cash flows. | Priority: High

Solving for I/Y

Find the interest rate or return. | Formula/Calculator: Enter N, PV, PMT/FV; CPT I/Y. | Memory cue: What rate turns PV into FV? | Priority: High

Solving for N

Find the number of periods needed. | Formula/Calculator: Enter I/Y, PV, PMT/FV; CPT N. | Memory cue: How long until money grows? | Priority: Medium

Calculator Decimal Setting

Controls number of decimals displayed. | Formula/Calculator: 2nd + FORMAT; set decimals as required. | Memory cue: Do not round too early. | Priority: Medium

Calculator P/Y Setting

Payments per year setting; can affect TVM calculations. | Formula/Calculator: Usually set P/Y = 1 unless instructed. | Memory cue: Check before exam. | Priority: High

Annuity Future Value

Future value of equal periodic payments. | Formula/Calculator: Use N, I/Y, PMT, CPT FV. | Memory cue: How much will monthly savings grow to? | Priority: High

Annuity Present Value

Present value of equal periodic payments. | Formula/Calculator: Use N, I/Y, PMT, CPT PV. | Memory cue: Value today of loan payments. | Priority: High

Loan Amortization

Paying off a loan over time with regular payments. | Formula/Calculator: Each payment includes interest + principal. | Memory cue: Mortgage/car loan payment schedule. | Priority: Medium

Amortization Payment

Equal payment needed to repay a loan over a set number of periods. | Formula/Calculator: PV = loan amount, FV = 0, CPT PMT. | Memory cue: Find monthly loan payment. | Priority: High

Balloon Payment

Large final payment due at the end of a loan. | Formula/Calculator: FV may not equal 0. | Memory cue: Loan not fully amortized. | Priority: Low

Nominal Rate / APR

Quoted annual rate that does not fully account for compounding within the year. | Formula/Calculator: APR = periodic rate × periods per year. | Memory cue: Advertised loan rate. | Priority: High

Periodic Rate

Interest rate per compounding period. | Formula/Calculator: Periodic rate = APR / m. | Memory cue: Monthly rate = APR / 12. | Priority: High

Effective Annual Rate (EAR)

Actual annual rate after considering compounding. | Formula/Calculator: EAR = (1 + APR/m)^m - 1 | Memory cue: True annual cost/return. | Priority: High

Compounding Frequency

How often interest is added: annually, semiannually, quarterly, monthly, daily. | Formula/Calculator: More frequent compounding increases EAR. | Memory cue: Monthly beats annual if APR same. | Priority: Medium

Semiannual Compounding

Interest is compounded twice per year. | Formula/Calculator: Periodic rate = APR/2; periods = years×2. | Memory cue: Common in bond problems later. | Priority: Medium

Monthly Compounding

Interest is compounded twelve times per year. | Formula/Calculator: Periodic rate = APR/12; periods = years×12. | Memory cue: Common in loans and credit cards. | Priority: Medium

Continuous Compounding

Compounding happens constantly. | Formula/Calculator: FV = PV × e^(rt) | Memory cue: Less common for intro exam unless assigned. | Priority: Low

Formula Sheet

Personal study sheet listing formulas, calculator steps, and common mistakes. | Formula/Calculator: Update daily. | Memory cue: Build it before exam week. | Priority: High

Error Log

List of missed problems and why you missed them. | Formula/Calculator: Review before exams. | Memory cue: Your custom study guide. | Priority: High

Problem Type Recognition

Ability to identify which formula/calculator setup a question requires. | Formula/Calculator: Ask: lump sum, annuity, perpetuity, or uneven cash flows? | Memory cue: Recognize before calculating. | Priority: High

Rounding Rule

Avoid rounding intermediate steps too early. | Formula/Calculator: Use calculator memory/full precision. | Memory cue: Round only final answer unless told. | Priority: High

Exam 1 Focus

Based on syllabus: corporate finance/financial manager and time value of money/cash flow streams. | Formula/Calculator: Old syllabus lists Exam 1 as Chapters 1, 3, 4. | Memory cue: TVM is the core. | Priority: High