- •What are agency costs, and who bears them?
- •Identify some factors beyond a firm’s control that influence its stock price.
- •Define ebitda and please define the reasons of calculating ebitda.
- •Explain statement of cash flows and types of questions it answers.
- •Identify and briefly explain the 3 different categories of activities shown in the statement of cash flows.
- •Define net operating working capital and total operating capital.
- •Determine nopat and explain why it might be a better performance measure than net income.
- •Define free cash flow and explain why free cash flow the most important determinant of a firm’s value.
- •Define the terms “Market Value Added”(mva) and “Economic Value Added (eva)”. Explain the differences between eva and accounting profit.
- •Determine characteristics of liquid assets and identify the ratios that are used to analyze a firm’s liquidity position and write out their equations.
- •Identify 4 ratios that are used to measure how effectively a firm is managing its assets, and write out their equations.
- •Explain the financial leverage and usage of financial leverage.
- •Identify and write out the
- •Describe 3 ratios that relate a firm’s stock price to its earnings, cash flow, and book value per share, and write out their equations.
- •Explain the calculation of book value per share and explain how inflation and goodwill cause book values to deviate from market values.
- •Define the usage of Du Pont system to analyze ways of improving the firm’s performance.
- •Define the standard deviation and coefficient of variation, and explain which one is a better measure for performance.
- •Explain the following statement: “most investors are risk averse”. Explain the relationship between risk aversion and rates of return.
- •Determine Security Market Line and construction of this line.
- •Explain Market Risk Premium and calculation.
- •Explain the correlation between returns on a project and returns on the firm’s other assets affect the project’s risk.
- •Define floating rate bonds and zero coupon bonds.
- •Define convertible bonds, bonds with warrants, income bonds, and indexed bonds.
- •Explain the reasons why bonds with warrants and convertible bonds have lower coupons than similarly rated bonds that do not have these features.
- •Explain what happens to the price of a fixed-rate bond if (1) interest rates rise above the bond’s coupon rate or (2) interest rates fall below the bond’s coupon rate.
- •Explain why prices of fixed-rate bonds fall if expectations for inflation rise. Define discount bond and a premium bond.
- •Explain the yield to maturity and yield to call, and describe their differences.
- •Differentiate between interest rate risk and reinvestment rate risk.
- •To which type of risk are holders of long-term bonds more exposed and short-term bondholders?
- •Explain and define mortgage bonds, debentures, and junk bonds.
- •Explain reasons for the existence of the preemptive right
- •Explain the reasons why a company uses classified stocks.
- •Define and differentiate between a closely held corporation and a publicly owned corporation
- •Define and differentiate between primary, secondary markets and ipo.
- •Determine the capital gains yield and the dividend yield of a stock.
- •Define the two parts of most stock’s expected total return.
- •Write out and explain the valuation formula for a constant growth stock.
- •Define the conditions that a company must hold if a stock to be evaluated using the constant growth model.
- •Explain how one would find the value of a supernormal growth stock.
- •Explain what is meant by terminal date and terminal value?
- •Define the conditions for a stock to be in equilibrium.
- •42.Efficient markets hypothesis.
- •Define the difference among the three forms of efficient market hypothesis: (1) weak form, (2) semistrong form, and (3) strong form.
- •2. Semi-Strong emh
- •3. Strong-Form emh
- •Explain the following statement: “Preferred stock is a hybrid security”.
- •Identify the firms 3 major capital structure components, and give their respective component cost symbols.
- •Explain the reasons of using after-tax cost of debt rather than the before-tax cost in calculating the weighted average cost of capital.
- •Explain three approaches that are used to estimate the cost of common equity.
- •Identify some problems with the capm approach.
- •Explain the two approaches that can be used to adjust for flotation costs.
- •Write out the equation for the weighted average cost of capital and explain.
- •Explain the calculation of debt structure in the capital structure used to calculate wacc.
- •Define the two factors that affect the cost of capital that are generally beyond the firm’s control.
- •Explain how a change in interest rates would affect each component of the weighted average cost of capital.
- •Three types of project risk and show the level of relevance.
- •Describe the pure play and the accounting beta methods for estimating individual project’s betas.
- •Identify some problem areas in cost of capital analysis. Explain how they invalidate the cost of capital procedures.
- •Define the determination of the capital structure weights that are used to calculate the wacc
Determine characteristics of liquid assets and identify the ratios that are used to analyze a firm’s liquidity position and write out their equations.
Liquid Asset -an asset that can be converted to cash quickly without having to reduce the asset’s price very much. A liquidity ratio is a ratio that shows the relationship of a firm’s cash and other current assets to its current liabilities. Two commonly used liquidity ratios are the current ratio and quick, or acid test, ratio.
The current ratio is found by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current ratio = current assets/current liabilities
The quick, or acid test, ratio is found by taking current assets less inventories and then dividing by current liabilities. Quick ratio= current assets-investments/current liabilities
Unit - times
Identify 4 ratios that are used to measure how effectively a firm is managing its assets, and write out their equations.
Asset management ratios are a set of ratios that measure how effectively a firm is managing its assets.
Inventory Turnover Ratio- use to evaluate inventories. ITR=sales/inventories
Days Sales Outstanding – used to evaluate Receivables. DSO=receivables/average sales per day=receivables/annual sales/365
Fixed assets turnover – measures how effectively the firm uses its plant and equipment. FAT=sales/net fixed asstes
Total assets turnover- measures the turnover of all the firm’s assets. TAT=sales/total assets
Unit- times, except DSO - days
Explain the financial leverage and usage of financial leverage.
Financing leverage- the use of debt financing. The use of borrowed money to increase production volume, and thus sales and earnings. The greater the amount of debt, the greater the financial leverage. It is also a measure of a company's ability to repay its obligations. When examining the health of a company, it is critical to pay attention to the financing leverage. If the financing leverage is increasing, the company is being financed by creditors rather than from its own financial sources which may be a dangerous trend. Lenders and investors usually prefer low financing leverage because their interests are better protected in the event of a business decline. Thus, companies with high financing leverage may not be able to attract additional lending capital.
Identify and write out the
equations for 4 ratios that show the combined effects of liquidity, asset management and debt management of profitability.
1. Profit margin on sales=net income available to common stockholders/sales; this ratio measures net income per dollar of sales
2. Basic Earning Power= EBIT/total assets;this ratio indicates the ability of the firm’s assets to generate operating income.
3. (ROA)Return on total assets= net income available to common stockholders/total assets net income available
4. (ROE)Return on Common Equity= net income available to common stockholders/common equity; measures the rate of return on common stockholders’ investment
Unit - %