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PSU FIN 301 - Exam 1 Study Guide

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Financial EthicsFinance 301 1st EditionExam # 1 Study Guide Lectures: 1 - 7Chapter 1Terms- Finance- Corporate finance- Capital market- Debt- Stocks- Market efficiency- Asset allocation- Diversification- Risk- Markets- Financial intermediaries- Investment decision- Financing decision- Net present value- Cost of capital- Primary markets- Secondary markets- Liquidity- Direct finance- Indirect financeI. What is Finance?a. The Management of Moneyb. The Three Primary Areas of Financei. Corporate financeii. Institutions and marketsiii. Investments II. Financial Decisions and the Financial Toolboxa. Financial statements and ratiosi. Present value – future valueii. Spreadsheet modelingiii. Models of risk and returnI. The Importance of Financial Marketsa. Agricultural, Energy, Gold, Currencies CapitalII. The Uniqueness of Capital Marketsa. Debt and Equity Marketsb. The Role of Capital Marketsc. Free markets versus government controlled marketsI. Free MarketsII. Government-Controlled MarketsIII. Case study – Financial Crisesa. The four common elements of financial crisesI. Excessive InvestmentII. Easy FinancingIII. Government BailoutIV. It will Happen againb. Warren Buffet Case studyChapter 2The Principles of FinanceTerms- Return and risk- Mean reversion- Efficient capital markets- Capital asset pricing model- Beta - Market risk premium- Risk aversion- Simple average- Compound average- Time value of money- Present value- Future value- Compounding- Discounting- Modern portfolio theory- Asset allocation - Efficient Frontier- Systematic risk- Unsystematic risk- DiversificationIV. Ten Principles of Financea. Higher Returns Require Taking More Risk I. Key Number to know – annual stock market return = 10%b. Efficient Capital Markets are Tough to Beatc. Rational Investors are Risk Averse d. Supply and Demand Drive Stock Prices in the Short-run e. Corporate Finance and Governance:I. Corporate Managers Should Make Decisions ThatII. Maximize Shareholder Valuef. Transaction Costs, Taxes and Inflation are Your Enemies g. Time and the Value of Money are Closely Relatedh. Asset Allocation is a Very Important Decisioni. Asset Diversification Reduces Riskj. An Asset Pricing Model Should be Used to Value Investments V. Traditional vs. Behavioral Financea. Greed vs. Fearb. Mind Over Money Video – Traditional or rational finance vs. behavioral financeI. $20 Bill ExperimentII. Traditional/Rational Finance1. Gary Becker – Adam Smith – John Cochran2. Models of Rational Individual Behavior3. Free Markets – Long-Term Economic Growth4. Missed Seeing Financial Crisis Comingc. Behavioral FinanceI. Thaler – ShillerII. People Can be Irrational III. Financial Crisis is Proofd. The key differences between traditional and behavioral financeI. Key issue – are markets price efficient?e. Who believes in traditional or rational finance vs. behavioral financeChapter 3Terms- CFO- Controller- Treasurer- Capital budgeting- Capital Structure- Working capital - Shareholder value- Corporate governance- Sole proprietorship- Partnership- Corporation- Limited/ unlimited liability- Dividends- Stock buy- back- Capital gains- Free cash flow- Return on equity- Stock options- Acquisitions- Divestiture- Agency problem- Stock split- Corporate raider- Hostile takeover- Junk bond- Voting rights- Shark repellent- White knight- Pac- man defense- Greenmail- Golden parachute- Self- tender offer- Poison pill- Crown jewels- Proxy solicitations- Mutual fund- Insider trading- Institutional Investors- Shareholder activism I. The Finance function and the CFOa. Treasurer duties and activities – financeb. Controller duties and activities – accounting II. Case Study – The CFOIII. The new corporate financea. The financial environmentb. Elements of new financial environment – events reflected in markets around the worldc. Advances in Financei. The role of academic advances in financeIV. The CFO as financial engineera. The traditional and new roles of the CFOi. Controller vs. treasurerii. Communicator with marketsb. CFOs of the YearV. Key Areas of Strategic Financial Managementa. Working capital management – daily activitiesb. Capital budgeting – investments for growthc. Capital structure – debt/equity to finance investmenti. Who leads US in sales, Cash, Inventories, Plant, Debt, Market ValueVI. Gordon Gekko's message in Wall Streeta. Management lessonsVII. Creating Shareholder Valuea. What is creating shareholder value?b. Corporate examplesVIII. Creating Shareholder Value LessonsIX. Market capitalizationa. What is it?b. How is it measured?i. # shares * price per shareii. Why is it important?X. The most valuable company in the USChapter 4Terms- Financial accounting- Balance sheet- Income statement- Statement of cash flows- Statement of retained earnings- GAAP- Assets- Liabilities- Equity- Revenue- Expenses- Net income- Auditing- 10-k- 10-q- Cash accounting- Accrual accounting- Current assets- Inventory- Accounts Receivable- Current liabilities- Long- term assets- Goodwill- Long-term liabilities- Off balance sheet activities- Cost of goods sold- Gross margin- Selling expenses- General and administrative expenses- Operating expenses- Income tax expenses- Earnings per share- EPS dilution- Operating activities- Investing activities- Financing activities- Common size statement- Liquidity ratios- Acid- test ratio- Activity/ efficiency ratio- Leverage ratios- Debt covenantI. Case Study: The Numbers You Need to Knowa. DJIA, 30-Year Treasury, Gold, NASDAQ, barrel of oil, II. Value maximization as a guiding principleIII. Corporate Stakeholdersa. The stakeholder philosophyIV. Stakeholders vs. Stockholders a. Stakeholders are protected by contractsb. Stockholders as the residual claimants of a firm's cash flowsc. Stakeholders and Stockholders and the Income Statement:i. Stockholders get what’s left over!V. Winning in Business - Shareholder Valuea. Microsoft vs. Saturn exampleVI. The Dual Challenges of Managementa. Compete in Product and Provide a Competitive Return in Capital MarketsVII. The challenges to the Shareholder Value Standarda. Too much focus on markets, short-term horizon, Issues in markets, scandals, and CEO compensationVIII. How does Management Create Shareholder Value?a. Return on Investment > Cost of CapitalIX. Avenues of shareholder value creation in financial managementa. Investments with the highest risk-adjusted returns (high ROI)b. Minimize the cost of capital via financial engineeringc. Enhance performance with


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