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UNT FINA 3770 - Exam 1 Study Guide
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FINA 3770Exam # 1 Study Guide Lectures: 1 - 8Exam covers topics one and two. Topic 1 (Accounting Review and Basic Financial Concepts) NOTE TO READER: Remember, the professor has sample accounting exams from previous semesters in his book. Utilize those and practice the questions. Use this document as an aid topool your information.Definitions/Formulas to know from "Addition material handout":- Total equity = preferred stock + common stockholder equity - Common stockholder equity (aka total shareholder equity or stockholder equity) = common stock at par value + capital surplus (also called paid in capital in excess of par+ retained earnings)- Financial structure= % of short term debt, long term debt and stockholder equity in the financing side of the balance sheet- Capital structure: Long term or permanent source of funds: Percentage of only long termdebt and stockholder equity from the financing side of the balance sheet- PE = current stock price divided by earnings per share- Earnings per share = EPS = Earnings available to common stockholders divided by number of common shares outstanding. If the firm has no preferred stock, you take the net profit after taxes and divide by the number of common shares outstanding. - Dividend payout ratio = Dividend per share divided by earnings per share- Dividends per share= total common stock dividends paid out divided by the number of common shares outstanding - Book value per share = common stockholder equity divided by number of common shares outstanding- P/BV = Current stock price divided by book value per share- Dividend yield = Dividends per share divided by current stock price- Internal equity= retained earnings of firm (internal to the firm coming through profits earned)- External equity= new stock issued by firm to raise money (common stock) Basic accounting equation: Assets = Liabilities + Equity - Income statement overview:Operating activitiesSalesLess: Cost of goods soldGross profitLess: Operating expenses Operating income- Financing activitiesOperating incomeLess: Interest expenseEarnings before taxesLess: Corporate taxesEarnings after taxesLess: DividendsRetained EarningsDepreciation: Depreciation is the process of allocating cost of plant assets to expense over the periods that benefit from their use. - Depreciation is tax deductible and a non-cash expense- It is usually calculated by the straight-line method, which is the cost of the asset divided by the useful life of the asset. - There is another way of calculating depreciation by allocating more depreciation to the earlier years of the assets life than to later years. This method is called accelerated depreciation.- Land is not depreciated. Marginal vs. Average Tax Computations: Marginal tax: the rate at which additional income is taxed. Average tax rate: Divide taxes paid by taxable income to find the rate. It is the average tax rate on all income earnedReview Questions:1) In what order are items listed in the balance sheet? Current assets, fixed assets, other assets, current liabilities, long term debt2) Whose responsibility is it to maximize the wealth of stockholders?  Management3) What is so unique about depreciation expense in relation to all other expenses?  It is not actually paid out to an entity for financial purposes. It lowers income for taxing purposes. It is also a non-cash expense. 4) Do you depreciate land? No!5) How are accumulated retained earnings on the balance sheet and retained earnings on the income statement connected over time?  They're accumulated and can be tracked from year to year6) Are retained earnings the same as cash? No, they are simply profits reinvested by management.7) Where is retained earnings actually found in the company? Reinvested dollars back into the company8) What are the connections between net profits, dividends paid out, and retained earnings?  Net profit is the amount after taxes and expenses. Then dividends are paid out, resulting in the remaining amount being retained earnings.9) Who decides the payment of dividends, since it is not mandatory?  Top management/ board of directors10) How often are dividends paid? What about long-term bonds' interest? Dividends are paid quarterly. Long-term bonds' interest is paid semiannually11) What is the difference between preferred and common stock? Common stock is basic stock issued from a corporation. Preferred stockowners get a fixed dividend and get it before common stockholders get theirs. 12) What is the difference between capital structure and financial structure? Capital structure equals current, long term, and equity as a percentage Financial is long term and equity as a percentageKNOW QUESTIONS FROM EXAMS IN HIS TEXTBOOK. THESE DEFINITIONS WILL HELP YOU SOLVE THE EXAM QUESTIONS.Topic 2 (Financial Markets and Interest Rates) Where do funds come from?They can either come from internal or external funds. Internal funds consist of depreciation and retained earnings. It provides about 70% of the total funds raised. External funds come from bonds or debt, common stock and preferred stock. Primary/Secondary; Money and Capital Markets Primary Money Markets: Original issuance of short-term securities. (Example: treasury bills, commercial paper) Secondary money market: Trading among investors in short-term securities, mostly in anover the counter market Primary capital market: Original issuance of long-term securities  Secondary capital market: Trading among investors in long-term securitiesExchanges vs OTC Markets Organized exchanges take place in a physical place/trading space. It includes places such as NYSE, AMEX, and Regional Exchanges OTC (over the counter) markets do not have a physical trading location. Most corporate bonds are traded in OTC markets. It is a loose network of brokers/dealers. The average price of securities is lower compared to the NYSE. NASDAQ is a computerized network on the OTC Market that helps with getting quick and accurate information.Public and Private Offerings Public offer:o Large number of buyers, impersonal, not very flexible for the corporation, time consuming, higher flotation cost, lower interest rateo Uses investment bankers who can do the following: Underwrite, give general advice, Help distribute and market securities Private offero Small number of buyers, lacks liquidity, personal, flexible for the seller, quick to raise money and a lower flotation cost,


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UNT FINA 3770 - Exam 1 Study Guide

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