FIL 240 Final

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School

Illinois State University *

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240

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Finance

Date

Jan 9, 2024

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LOOK THROUGH QUIZZES AND MIDTERM EXAM (almost same q's) Useful Spreadsheets bond calcs (either enhanced or unenhanced) Loan Payment NPV and IRR Present and Future Values Risk and Return Stock Valuation WACC 1 Examples ( Bond calculation spreadsheet ) Described a bond and asked for the price and yield on it. ( Loan Payment Spreadsheet ) What is going to be the payment/effective rate on a house/car you buy? ( NPV and IRR Spreadsheet ) Ask you for the net present value and internal rate of return. ( Present and Future Value ) You are going to receive 800 a month for 10 years, what would it be worth today /// Starting today you are going to be putting X dollars into ( Risk and Return Spreadsheet ) The risk-free rate is... ( WACC 1 ) Follow the template, put numbers in the white boxes to return the answer in grey boxes. Know the Financial Operations Formula Sheet Term 42: OBV (on balance volume) Know the difference between 10K and 8K (10K is more important) What’s a 10q, 10k, 8k. 10q- 10k- (would find an MD&A in this document) 8k- The first public disclosure by a public company to the SEC of a non-recurring event

KNOW: Relationship between price and yield of a bond Relationship between net present value and internal rate of return: Internal Rate of Return: The discount rate that makes the net present value: Zero. Any discount rate BELOW the internal rate of return is POSITIVE . Any discount rate ABOVE the internal rate of intern is: NEGATIVE. 3 parts of financial intermediation: Know who has residual claim and who has prior claim to cash flows in a corporation. Component cost of capital (In order from expensive to cheap): cost of debt (Most expensive) cost of preferred stock cost of retained earnings. cost of new equity (Cheapest) *Know formulas* What’s the relationship between risk and return. The same is true for liquidity (know the definition he gave us) What happens when a corporation defaults? Chapter 11/7 (bankruptcy code) What’s the difference between money and capital? What’s Spot and Forward?

Primary and Secondary markets? Primary market: Corporations raise capital by issuing new securities. Secondary market: Securities and other financial assets are traded among investors after they have been issued by corporations. What are the different monetary aggregates such as M0, M1, M2, M3? - M0: Paper money and coin currency in circulation - M1: M0 plus demand deposits and traveler’s checks - M2: M1 plus savings deposits and money market shares - M3: M2 plus large time deposits, institutional money market funds, and short-term repo How many governors are there? Districts? Who does what. . . Governors- 7 appointed by president with the advice and consent of senate. Districts- 12 federal reserve districts that each has a main district bank Three different roles of the federal reserve - Regulates banks (financial markets) - Controls the supply of money - Sets interest rates Basic question about open market operations Know how to use the capital asset pricing model ("use cap M") - based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification. Market premium over risk free What are the parts of the risk-free rate/risk premium? "Accounts payable have increased since the last period" (This will increase cash flow.) Is the russel2000, Dow 30, S&P500 a stock exchange? No, there are #'s after them. Are NYSE and NASDAQ stock exchanges? No #'s so yes, they are

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Systematic & Nonsystematic Systematic risk: Non diversifiable Nonsystematic risk: Diversifiable Systematic + Nonsystematic = Total Risk Beta is measure of systematic risk. Sigma is a measure of total risk. What’s the difference between bill, note, bond? What’s commercial paper? (Bill, Note, Bond) What’s the difference between accounting and finance (terms of cost)? Accounting doesn’t include all economic costs. Profit in accounting is cost in finance. How many people are on the FOMC? What is the formula for free cash flow (Q. "which of these is correct?") Midterm Exam Which of the following costs would not be included in accounting financial statements? [Mark all that apply.] opportunity costs & replacement costs Which statement is correct? Liquidity is the efficiency with which an asset can be converted into another asset. You borrowed $500 from your friend, and he agrees to let you pay it back in two years. You issued a note to your friend. Which statement is false? [Mark all that are false.]

- Once a corporation pays a dividend to its shareholders, it must pay a dividend every year thereafter. - As a general rule, a higher P/E ratio indicates a stock that is undervalued. - Shareholders get their dividends before bondholders get theirs. - A corporation with positive net income must pay a dividend to its common shareholders. Which statement is true? - A short-term T-bill has a beta of 0.00. - Financial statements do not reflect economic costs. (T/F) The market price of a share of common stock represents its intrinsic value. FALSE Which statement is false? A company must reinvest all earnings back into the company. Funds available to corporate issuers of commercial paper come from which market? - Money market Which of the following is included in the risk-free rate? - The real rate of return - The expected inflation premium. On which of the following forms would you find a public corporation's audited annual financial statements? - Form 10-K Which statement is correct? [Mark all that apply] - ROA ≤ ROE - Current ratio ≥ Burn ratio Which business entity could have common stock authorized? A Corporation Finding the present value of future cash flows is called ___discounting___ and finding the future value of present cash flows is called ___compounding___. When a company is about to launch a new product, it must add inventory of the product before the launch in stores. This would ____decrease____ free cash flow in the period the inventory was created. (T/F) In general, assets with higher liquidity will have higher expected returns than assets with lower liquidity. FALSE (T/F) The bond market is smaller than the stock market. FALSE When finding a present value of a future amount of money, increasing the discount rate would do which of the following? Decrease the present value. Which statement is true? - debt-to-total assets ≤ 1.00 - 0.00 ≤ plowback ratio ≤ 1.00 - Current ratio ≥ acid test The stockholders of a corporation have the prior claim to the cash flows of the company, and the debtholders have the residual claim. FALSE

(T/F) The S&P 500, the Dow 30, and the NASDAQ are all stock exchanges. FALSE Which risk premium would be in the yield on a 30-year Treasury bond? The maturity premium As the price of a bond goes up, its yield ___ goes down ___. Finance is most closely related to which academic discipline? Economics (T/F) Bank of America common stock trades on the NASDAQ. FALSE, NYSE Match the description to the most appropriate word or term. - Large-scale movement of investors’ funds from riskier investments to safer investments ( flight to quality) - Short-term funds (money) - Current upside resistance level for gold per ounce (two thousand dollars) - T he sum of the default, maturity, and liquidity premia (risk premium) - Uncollateralized bond (debenture) Quiz 7 Answers (T/F) Salvage value is always positive. FALSE The internal rate of return of a project is the discount rate that makes the net present value _____Zero_____. Quiz 5 Answers The graph that plots the betas of stocks on the horizontal axis and their associated expected returns on the vertical axis is called the ____securities market line____. The Capital Asset Pricing Model is used to calculate the ___expected return for___ a security. Quiz 3 Answers Which statement is correct? ROA ≤ ROE Which statement is false? ROE < ROA (T/F) The present value of annuity decreases as the discount rate used for the cash flows increases. TRUE Finding the present value of future funds is called discounting and finding the future value of present money is called compounding. Quiz 2 Answers Successful financial intermediation must have which of the following factors considered. [Mark all that apply.] - Timing - Level - Risk

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A company that has already gone public may subsequently offer additional common stock to the public in a seasoned offering. (T/F) A typical investor can buy and sell common stock in either the primary or the secondary market depending upon which broker he or she prefers to use. FALSE On which financial statement(s) would you find Accounts Receivable? [Mark all answers that are correct.] - Balance Sheet - Statement of Cash Flows Cash flow will ___decrease___ from a period-over-period decrease in Accounts Payable. Quiz 1 Answers Which of the following statements are true (mark all that apply). - Beta stock is a measure of its risk. - The prices you pay for groceries at the store are at spot. Which type of business can issue common stock (mark all responses that are correct). Corporation Which is correct about stock prices? Bid ≤ Ask. (T/F) The stockholders of a corporation have the first claim to the cash flows of a corporation. FALSE