FIN 365: Business FinanceExam 3–Review and Formula SheetExam Description - Length: One Hour- Weight: 20% of course grade- Not Cumulative-however, the course builds upon earlier material, so you may need someof the previous material to do later problems. - Structure:o Conceptual Questions: These are short answer questions in which you may beasked to define a term, describe a theory, etc.o Calculations: Financial calculations, graphs, etc. similar to problems done inclass, on the problem sets, and the assigned end of chapter problems. Having and knowing how to use a financial calculator is essential fordoing well on this exam.Exam Policies- You may use a financial calculator for all calculations including statistical calculations.- You may not use the textbook, notes, crib sheets, formulae sheets, etc. The formulaebelow are provided for study purposes only.- You may not substitute a cell phone, PDA, for the calculator. The only exceptions areaccommodations authorized by Disability Support Services. - For calculations you must show all your work for any credit.o To show your work when using a financial calculator, list the inputs, e.g., N = 3,I/Y = 8,...- In yours answers, provide two decimal point accuracy for dollars, e.g., $14.13, and fourdecimal points for percentages, e.g., 0.0134 or 1.34%.- Make-up exams will only be given if there is official documentation of an emergency, e.g.,a doctor’s note. Coverage–The exam will cover all material up to and including Topic 14 (remember there isno Topic 15). The main ideas, theories and techniques are listed below. This is to help you getthe ‘big picture’ but is not an exhaustive list, i.e., exam questions and problems will not berestricted to these main ideas. Also, you are responsible for ideas in the assigned readingseven if they are not discussed in class.- Topic 9-Statistical Reviewo Measures of Central Tendency Mean, Median, Modeo Measures of Dispersion Standard Deviation, Varianceo Higher Moments Skewness, Kurtosiso Measures of Dependency Covariance, Correlationo Histogramso Linear Regression- Topics 10, 11, 12– Risk and Rates of Returno Risk Definition of Risk Three Step Analysis of Risk Market versus Non-Market Risko Diversification Financial Diversification Expected Return and Standard Deviation/Variance of a Two AssetPortfolio Failure of Standard Deviation/Variance as Risk Measureso Capital Asset Pricing Model (CAPM) Beta Security Market Line (SML) CAPM Equation- Topic 13–Bonds and Their Valuationo Basic Features, Types and Terminology of Bonds o Bond Valuationo Yield to Maturity (YTM), Yield to Call (YTC)o Interest Rate Risko Discount, Par Value and Premium Bondso Advanced Features of Bonds Call Options Sinking Funds, etc.- Topic 14– Stocks and Their Valuationo Basic Features, Types and Terminology of Stock o Comparison of Stocks and Bondso Common Stock Valuation Dividend Discount Model (DDM)- Constant Model: Dividends constant- Growth Model: Dividends change at a constant rate- Mixed Model: Dividends change at different rateso Preferred Stock Valuationo Implied Rate if Return on Stocks- Topic 15– Cost of Capitalo Sources of Capitalo Constructing the Weightso Calculating the Cost of Debt, Preferred Shares and Stocko The Tax Implications of Debto Calculating WACCStudy Suggestions- Study in groups- Use flashcards for ideas, definitions, theories, etc.- Do a lot of practice problems- Conceptual Questionso Study the slides–Anything that is the subject of a full slide is important.o Read the textbook. IMPORTANT: You are responsible for the assigned textbookmaterial even if we do not cover the material in class.o Know the key words from the textbook which are listed at the end of the chapter.o Answer the selected end of chapter questions–These are listed by topic on theschedule and the solutions are in Blackboard.o Review your class notes–Anything occurring multiple times is importantespecially if it is mentioned under different topics.- Calculationso Study the examples done in class and the worked problem sets distributedbefore each exam.o Answer and understand the selected end of chapter problems–These are listedby topic on the schedule and the solutions are in Blackboard.Formulae–You may not use this or any other list of these formulae during the exam..Statistical Review: You may use either these formula or the statistical functions on yourcalculator. Remember to show your work..- Mean (Equally Weighted) m==�1niixn- Mean (Unequally Weighted)m==�1ni iip x- Variances=-=-�221( )1niix xn- Standard Deviation221( )1niix xns s=-= =-�- Covariances=- -=�1,( )( )ni iiA Bx x y yn- Correlationsrs s=,,a bA Ba bNOTE: On the exam, you will not be asked to construct a histogram or do any calculationsinvolving linear regression.Two Asset Portfolio: I will not include interest rate formulae for problems that can be done onyour calculator.- Expected Return[ ]= +A A B BE r w r w r- Variances s s s s r= + +2 2 2 2 2,2A A B B A B A B A Bw w w wCapital Asset Pricing Model (CAPM) - Betasbs=,2i MiM- CAPM Equation[ ] [ ]( )b= + -i f i M fE r r E r rBonds: I do not include formulae, you are to use a financial calculator to do these. - Yield to Maturity (YTM)o N = Number of Periods to Maturityo FV = Par Value - Yield to Call (YTC)o N = Number of Periods to Callo FV = Call Price Stock: - Constant Model=CEdVr- Growth Model=-1CEdVr g- Mixed Model( )+= + + + ++ + + -+K1 2 121(1 ) (1 ) (1 )1where n = the last period of the short termn nCEnnd d d dVr r r r grImplied Rates of Return: Solve the appropriate stock valuation formula for r. WACC: d d c p p s sWACC w r (1– ) w r w rt= +