CU Denver FNCE 3000 - EXAM 3 REVIEW MATERIAL (7 pages)

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EXAM 3 REVIEW MATERIAL



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EXAM 3 REVIEW MATERIAL

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Pages:
7
School:
University of Colorado Denver
Course:
Fnce 3000 - Principles of Finance
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NEW MATERIAL SINCE EXAM II TIME VALUE OF MONEY Pt III know how to calculate present value of a lump sum and explain the result PV FV 1 I N A lumpsum is a one time cashflow or payment and it occurs on one year or less If you wish to have FV and XX years n and you can earn compounded annually i you must invest today be able to calculate present value when compounding occurs more frequently than annually PVLS FV 1 I N Multiply N Divide i Semiannual 2 Quarterly 4 Monthly 12 Daily 365 understand the effect of compounding more frequently than annually on PV see Time Value of Money Pt III Discussion for Prob 5 24 parts a and b When it is compounded more frequently than annually PV gets smaller than what it would have been annually understand the relationship between PV and iTIME VALUE OF MONEY Pt IV know the difference between an ordinary annuity and an annuity due Ordinary annuity has regularly occurring payments and the END of the period Annuity Due comes at the BEGINNING of the period know how to find the future value of an annuity and explain the result EX 2000 end of year for 20 years compounded annually at 4 ORDINARY FVA PMT x 1 i n 1 i 2000x 1 04 20 1 04 or PMT 2000 PV 0 I Y 4 N 20 years CPT FV If you invest pmt at the end of every year for XX n years and earn compounded annually i you will have fva IF you want to find out FVA annuity due you the number for ordinary due and use this equation FVAannuitydue FVAordinary x 1 i know how to find the present value of an annuity and explain the result PVAordinary PMT x 1 1 1 i n i If you invest pmt at the beginning of every year for XX n and earn compounded annually i you will have pva INTRO TO VALUATION entire topic same as for QUIZ 2 Know other names for the fundamental value intrinsic or theoretical value be able to explain how to calculate the fundamental value V of an asset PVLS FV x 1 1 i n If you invest today and receive in XX years your compound annual rate of return will be be able to calculate the fundamental value of an asset given its cashflows Vpvls 1st payment PVLS 2nd payment if is your required return for an investment that pays your in XX years from now and another XX years after that you should pay for the investment know how to follow the steps in the valuation process but you won t have to list them know the following terms and how they relate to whether you should invest in the asset or not undervalued overvalued fairly valued Market Value Fundamental value UNDERVALUED BULLISH OUT LOOK Market Value Fundamental value FAIRLY VALUED NUETRAL Market Value Fundamental value OVERVALUED BEARISH OUTLOOK difference between bullish and bearish BOND VALUATION entire topic most of this was covered on QUIZ 2 be able to calculate current yield YTM and YTC Current Yields Annual Interest Current Market Vale YTM YTC review know another term for growth APRRECIATION CAPITAL GAIN Know which components of return income growth or both are measured by current yield YTM and YTM Current yield measures income of total return both income and growth YTM YTC Both measures total return YTC measures return on callable bonds be able to find the theoretical value of a bond and decide whether to buy or sell it based on the market value i e whether it is undervalued or overvalued and whether you are bullish or bearish know how to interpret YTM and YTC when compared to the required return for the bond like in Prob 7 9b Bond Valuation Discussion 2 Be able to determine whether interest rates have risen or fallen since the bond was issued based on the bond s YTM or its current market value like Bond Valuation Disc 5e be able to determine whether the issuer is likely to call the bond issue given the bond s coupon rate YTM and YTC like Bond Valuation Disc 5e be sure to go through the Bond Valaution COMPREHENSIVE discussion and the 3 Bond Valuation SELFIEQs COMMON STOCK VALUATION know how to solve for any variable in the Dividend Discount model given all the rest Know the definitions of asset based approach to valuation and relative valuation and be able to spot examples of them Asset based approach the company value lies in its assets than cash flow generated A company with a patent Relative Valuation Determine the intrinsic value and compare it a similar investment to determine if it is cheap to the other An analyst CORPORATE FINANCE The goal of financial management Maximize the wealth of the business owners How the goal is accomplished Who the true owners of the corporation are Common shareholders are the true owner because they have voting rights and they are last in line corporate liquidation How finance differs from accounting FNCE Future projections pro forma ACCT historical earnings what accrual basis accounting is Revenue is recorded when earned expense is recorded when incurred free cash flow Cash flow generated by the business above and beyond the capital needed to operate Total operating capital Capital needed to run a business CEO Chief Executive Officer highest ranking employee CFO Chief Financial Officer oversees treasury and accounting department and interface with board directors leaders shareholders potential investors Treasurer Head of treasury department Accountant Conflicts in financial relationships 1 Agency conflict potential for mgmt to act on its own best interest than the shareholders 2 Owner Lender Conflict owners may take risk that jeopardize lender principal 3 Owner Worker Conflict owners exploit workers and workers should unite to overthrow capitalist owners Know the difference between wealth and income Wealth What you have own Asset Liability net worth assets car investments Income How much you make earn salary interest dividend rent SKIP calculating free cash flow FCF CAPITAL BUDGETING Independent projects Some proposed projects are independent If Proposed Projects A and B are independent choosing to undertake Project A does not affect whether Project B is chosen Mutually exclusive projects choosing to pursue one project eliminates the possibility of choosing one or more other projects The one with the larger NPV is chosen over the other Calculate Payback period NPV IRR And interpret the answer see discussion problems NPV 0 00 accept NPV 0 reject IRR WACC accept the project if IRR WACC reject the project MIRR WACC accept project MIRR WACC reject project i Disadvantages of the payback method 1 Doesn t take the time value of money 2 Doesn t take into account of cash flows received after payback period 3 We don t know what an


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