FIN 3010 Exam 3 Study Guide

FIN 3010 Exam 3 Study Guide

FIN 3010 Exam 3 will cover chapters 2, 3, and 4 of the Fundamentals of Corporate Finance digital text.

Exam Structure

  • The exam consists of:

    • 44 questions worth approximately 2.2 points each, totaling 96 points.

    • 38 of the questions from Chapters 2, 3, and 4.

    • 6 core knowledge questions focusing on essential calculations.

  • Administered at the ISU Testing Center.

  • Proctoring Conditions:

    • Must be taken without the assistance of other students, the course e-text, Connect, or personal notes.

    • Allowed tools: financial calculator, scratch paper, and pencil.

    • Time limit: 65 minutes.

Chapter 2

Chapter 2 – Financial Statements, Taxes, and Cash Flow

Core Concepts

  • Liquidity:

    • Understand liquidity as it relates to the balance sheet and the liquidity level associated with balance sheet accounts.

    • Example: Cash is highly liquid, marketable securities are fairly liquid, while property, plant, and equipment are illiquid.

  • Financial Statements:

    • Familiarity with various types of financial statements, understanding the type of data presented on each.

    • Example: The balance sheet provides a snapshot of assets, liabilities, and equity at a specific point in time, while the income statement shows revenues and expenses over a period.

  • Cash Flow Impact:

    • Ability to explain the impact of cash and non-cash items on cash flow.

    • Example: Depreciation is a non-cash expense; although it reduces reported net income, it does not involve an outflow of cash.

  • Tax Rates:

    • Differences between marginal and average tax rates.

    • Calculation methods for both marginal and average tax rates.

    • Example: If a company has taxable income of 100,000$ and pays 20,000$ in taxes, its average tax rate is 2020%. If the next dollar earned is taxed at 2525%, then 2525% is the marginal tax rate.

Cash Flow Terminology

  • Definitions:

    • Operating Cash Flow

    • Cash Flow from Assets

    • Free Cash Flow

Calculations

  • Be able to perform calculations to determine:

    • Net Working Capital:

    • Book Value vs. Market Value:

    • Net Income:

    • Using income statement line items and tax rates.

    • By adding Dividend Paid and Additions to Retained Earnings.

    • By multiplying Sales by a company’s profit margin.

    • Average Tax Rates

    • Marginal Tax Rates

    • Net Capital Spending:

    • Operating Cash Flow:

    • Cash Flow to Creditors:

    • Cash Flow to Stockholders:

Chapter 3 – Working with Financial Statements

Statement of Cash Flows

  • Identification of sources and uses of cash.

Sources and Uses of Cash

  • Categories:

    • Operating Activities

      • Example: Cash received from customers, cash paid for supplies.

    • Investment Activities

      • Example: Cash spent on purchasing new equipment, cash received from selling old assets.

    • Financing Activities

      • Example: Cash raised by issuing new stock, cash paid as dividends.

Common-Size Financial Statements

  • Understand Common-Size Income Statements and Balance Sheets; what these are expressed as a percentage of.

  • Example: Useful for comparing the performance of companies of different sizes or tracking a company's performance over time, as all items are relative to a base figure (e.g., sales for income statement, total assets for balance sheet).

Calculations

  • Be able to perform calculations to determine:

    • Net Sources and Uses of Cash:

    • Net Cash Flow from Operating Activities:

    • Common-Sized Income Statement Line Items:

    • Common-Sized Balance Sheet Line Items:

    • Current and Quick Ratios:

    • Return on Assets:

    • Return on Equity:

    • Receivables Turnover Ratio:

    • Cash Coverage Ratio:

Chapter 4 – Long-Term Financial Planning & Growth

Financial Planning

  • Understand the components of the Financial Planning Process:

    • Role and objectives of Financial Planning.

    • Key components or ingredients in the Financial Planning process.

Pro Forma Financial Statements

  • Grasp the representation of Pro forma financial statements.

  • Example: These are projected financial statements (like income statements and balance sheets) that forecast a company's future financial position, often used for 'what-if' analyses related to growth.

Ratios

  • Definitions:

    • Dividend Payout Ratio

    • Retention Ratio

    • Plow Back Ratio

Calculations

  • Be able to perform calculations to determine pro forma:

    • External Financing Need (EFN)

    • Net Income

    • Retention Ratio

    • Internal Growth Rate

    • Sustainable Growth Rate

  • Important balance sheet relationships to understand:

    • Liabilities+Equity=AssetsLiabilities + Equity = Assets

    • Assets−Liabilities=EquityAssets - Liabilities = Equity

    • Assets−Equity=LiabilitiesAssets - Equity = Liabilities

    • CurrentLiabilities+LongTermDebt=TotalDebtCurrent Liabilities + Long Term Debt = Total Debt

    • CurrentAssets+NetFixedAssets=TotalAssetsCurrent Assets + Net Fixed Assets = Total Assets

    • CurrentAssets−CurrentLiabilities=NetWorkingCapitalCurrent Assets - Current Liabilities = Net Working Capital

    • FixedAssets−Depreciation=NetFixedAssetsFixed Assets - Depreciation = Net Fixed Assets

Formula Sheet

Key Calculations

  • Future Value (FV):

    • Input Present Value (-PV), Periods (N), Interest (I/Y) then Compute (CPT) FV.

  • Annuity Payment (PMT):

    • Input Present Value (-PV), Number of Payments (N), Interest (I/Y) then Compute (CPT) PMT.

  • Calculating NPV:

    • Press CF, enter initial Cash Flow CF0, ENTER, Down Arrow, C01, ENTER, Down Arrow, FO1, ENTER, Down Arrow (repeat as needed), then press NPV, enter discount rate (I), ENTER, Down Arrow, then Compute (CPT).

  • Bond Market Price (PV):

    • Par Value (FV), Coupon Payment (PMT), Number of Coupon Payments (N), Yield to Maturity (I/Y) then Compute (CPT) PV.

  • Dividend Growth Model:

    • Dividend1/(RequiredReturn%−DividendGrowthRate%)Dividend_1 / (Required Return \% - Dividend Growth Rate \%)

  • Average Tax Rate:

    • TaxesPayable/TaxableIncomeTaxes Payable / Taxable Income

  • Net Working Capital:

    • CurrentAssets−CurrentLiabilitiesCurrent Assets - Current Liabilities

  • Net Capital Spending:

    • EndingNetFixedAssets−BeginningNetFixedAssets+DepreciationEnding Net Fixed Assets - Beginning Net Fixed Assets + Depreciation

  • Operating Cash Flow:

    • EBIT+Depreciation−TaxesEBIT + Depreciation - Taxes

  • Cash Flow to Creditors:

    • BeginningLongTermDebt−EndingLongTermDebt+InterestBeginning Long Term Debt - Ending Long Term Debt + Interest

  • Cash Flow to Stockholders:

    • Dividends−NewEquityRaised+StockRepurchasedDividends - New Equity Raised + Stock Repurchased

  • Current Ratio:

    • CurrentAssets/CurrentLiabilitiesCurrent Assets / Current Liabilities

  • Quick Ratio:

    • (CurrentAssets−Inventory)/CurrentLiabilities(Current Assets - Inventory) / Current Liabilities

  • Profit Margin:

    • NetIncome/SalesNet Income / Sales

  • Return on Assets:

    • NetIncome/TotalAssetsNet Income / Total Assets

  • Return on Equity:

    • NetIncome/TotalEquityNet Income / Total Equity

  • Retention or Plowback Ratio:

    • AdditionstoRetainedEarnings/NetIncomeAdditions to Retained Earnings / Net Income

  • Dividend Payout Ratio:

    • Dividends/NetIncomeDividends / Net Income

    • Example: If a company earns 100,000$ in net income and pays out 30,000$ in dividends, its dividend payout ratio is 3030%.

  • Internal Growth Rate:

    • (ROA%×RetentionRatio)/(1−(ROA%×RetentionRatio))(ROA \% \times Retention Ratio) / (1 - (ROA \% \times Retention Ratio))

  • Sustainable Growth Rate:

    • (ROE%×RetentionRatio)/(1−(ROE%×RetentionRatio))(ROE \% \times Retention Ratio) / (1 - (ROE \% \times Retention Ratio))

  • External Financing Need: