FIL 240 Exam # 3 – Final Exam Study Guide Lectures: 1 - 25Lecture 1 (January 14)Introduction to Finance:What is the difference between finance and economics? Describe financial intermediation. Whatis an opportunity cost? How does historical cost affect risk?Finance:- sub-disciplinary of economicsEconomics:- study of scarce resources that are allocatedFinancial intermediation involves facilitating the flow of funds between surplus and deficit economic units. It takes into account timing, level, and risk. Opportunity cost is the cost of the best forgone experience, which drives decision-making. Historical cost does not impact risk at all; all that matters is the replacement risk.Lecture 2 (January 16) Describe the four areas of finance and the subset. Investments control stocks and other investments. Corporate finance analyzes potential projectsand how to invest. Institutional finance covers banking. Financial planning helps people and groups prepare for the future. Real Estate finance (subset) analyzes properties to see if they’re worth purchasing.How are interest rates decided?Interest rates are the percent of what you owe charged as a rental fee. All interest rates include the real interest rate, which is driven by the supply of and demand for money. Kf (risk-free rate) = Kreal + πe (expectation rate)What are the three types of markets?The money market is short-term money (less than 1 year); the capital market is long-term money (over 1 year); the commercial paper market is a debt instrument in the money market issued by corporations (90 days).Lecture 3 (January 21)What are the three types of money?Barter is trading goods for goods. Metal is gold or silver – must be in “fashion.” Fiat is by decree only, no intrinsic value (paper money).What are the three types of debt? A bill lasts less than or equal to one year, such as a cash advance or treasury bill; a note lasts between one year and seven years, such as a car loan or treasury note; a bond lasts more than seven years, such as a mortgage or treasury bond.Lecture 4 (January 23)What are the 5 types of financial intermediation?Banks, credit unions, savings & loans, insurance companies, and investment banksExplain the Federal Reserve System and Federal Reserve Board.The Federal Reserve System has a central bank that divides the country into 12 regions, controls the money supply, and oversees banking operations. The Federal Reserve Board is made up of 7 governors with one chairman. The Federal Reserve Board regulates and the district banks supervise. The Federal Reserve has 3 duties: regulates and supervises banks under its authority, bank for banks, and conducts monetary policy.What is monetary policy and what are the 3 tools?Monetary policy is deciding how much money is printed and what kind. Congress decides this. The 3 tools are open-market operations (purchase & sale of securities in the open market), discount rate, and the required reserve ratio (set by the Fed, based upon size of bank).What is the FOMC?The Federal Open Market Committee sets the discount rate and has 12 voting members – 7 permanent governors, 4 district bank presidents with rotating terms, and the NY district bank president)Lecture 5 (January 30)What are the 5 financial statements?Balance sheet, income statement, statement of cash flows, statement of retained earnings, and notes to the financial statementWhat is the fundamental accounting equation? How does this fit into the balance sheet?Assets = Liabilities + Stockholders’ EquityAssetsCurrent AssetsLong-term AssetsTotal AssetsLiabilitiesShort-term LiabilitiesLong-term LiabilitiesTotal LiabilitiesOwners’/Stockholders’ EquityCommon StockRetained EarningsTotal Owners’/Stockholders’ EquityTotal Liabilities & Stockholders’ EquityWhat is the Statement of Retained Earnings?Beginning RE+Net Income-DividendsEnding REWhat is the Income Statement?Revenues-COGSGross Margin-SG&A Expenses-DepreciationOperating Income-Interest ExpenseNet IncomeLecture 6 (February 4)What is financial statement analysis? What are the 2 types?Financial statement analysis is turning the information the accountants provide into informationother people can use. Technical analysis is using and analyzing numbers. Fundamental analysis is analyzing what numbers mean to us, using micro and macroeconomics, managers, how is society trending, etc.What is the percent change formula? What is the times interest earned formula?The percent change formula is the [(ending value-beginning value)/beginning value]*100. He times interest earned formula is earnings before interest & taxes (or operating income)/interest expense.Lecture 7 (February 6)What are the 3 profitability ratios? Gross margin is gross income (sales-COGS)/sales. Operating margin is operating income/sales. Net margin is net income/sales. What is the return on assets ratio?The ratio is net income/salesWhat is the return on equity?The ratio is net income/total stockholders’ equityWhat is the quick ratio?(Current assets-inventories)/current liabilitiesWhat is the current ratio?The ratio current assets/current liabilitiesWhat is the burn ratio?The ratio is cash & cash equivalents/current liabilitiesLecture 8 (February 11)What is inventory turnover?The ratio is sales/inventory. “Just in time” inventory can be a problem if you run out of inventoryand don’t have enough to get through the day. What is asset turnover?Sales/Total assets is the asset turnover ratio. A high asset turnover ratio can be a warning towards future breakdown.What are the 4 ways to measure risk?Standard deviation, coefficient of variation, interest rates, and betaExplain market-related risk, mutual funds, diversifiable risk, and ETF.Market-related risk is the bottom-line amount of risk always included when buying stock. Mutual funds are when you spend less money to have a diverse portfolio along with many others by pooling money. Diversifiable risk is risk you don’t have to take and are not rewarded by it. ETF is exchange-traded fund that invests in all the Standard & Poor’s 500 companies. Lecture 9 (February 13)What is market capitalization? What is the P/E ratio? Dividend yield?Market capitalization is the price per share*number of shares. The P/E ratio is the price per share/earnings per share; this is a measure of risk. Dividend yield is the return on investment for stock; it’s solved by dividends per share/price per share.What is beta? What is the beta of the market portfolio? Beta of