Special Saturday Session: Midterm Review Session

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Special Saturday SessionMidterm Review Session

• Corporate Finance (GSBA 548)
• J. K. Dietrich, March 31, 2007

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Midterm Examination

• Material through class of March 28 (LA) or March
  27 (OCC)
• Includes text chapters 1, 2, 3, 4, 5, 7, 14, and
  20, and other assigned readings
• Covers material contained in assigned
  end-of-chapter problems and Part 1 of group
  project
• Questions will come from
• End-of-chapter problems
• Class objectives and vocabulary
• Group project concepts and calculations

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Major Focus of Midterm

• Material in lectures and text concerned with
  topics in chapters 4, 5, and 7
• Basic finance principles discussed so far
• Goal is to maximize shareholders wealth
• Corporate governance developed to achieve goal
• Wealth is the present value of consumption and
  wealth is increased with positive NPV projects
• Value is the present value of cash flows at the
  risk adjusted discount rate
• Cash, time, risk determine value

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Principles and Techniques

• Six present value formulas are techniques needed
  to estimate values and accounting for timing
• Applications of simple present value formulas are
  used as techniques to value fixed-income
  securities since cash flows are contractually
  specified
• Stock (equity, share) values do not have fixed
  cash flow patterns but formulas useful in
  studying stock values and P-E ratios

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Estimating Future Cash Flows

• A financial decision to invest is analyzed in
  terms of its impact on incremental cash flows
• Revenues, costs, taxes, working capital, and
  capital expenditures are the important elements
  of cash flows for business decisions
• Revenue and operating assumptions are necessary
  to estimate each of these elements

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Text, Lectures, and Project

• Basic finance principles are the focus of the
  text assignments and problems
• Class discussion illustrates basic finance
  principles with Wall Street Journal data,
  stories, and group project
• In class, we have stressed corporate governance
  and book and market values (Chapter 1),
  real-life examples of corporate debt (Chapter 5),
  and cash flows from investments (Chapter 7)

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Topics Not Covered in Readings

• Bond prices in NASD Bondinfo and from other
  sources like Wall Street Journal
• Debt details in notes to financial statements
• Constant principle-payment loan formula
• Investment decision rules like payback period,
  average accounting return (both bad), internal
  rate of return (problematic)
• Capital budgeting and profitability index
• All these are discussed on class slides

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Suggestions for Midterm Review

• Review course syllabus, weekly class objectives
  (with vocabulary)
• Memorize present value formulas and identify
  their use in present value problems and
  evaluation fixed incomes
• Review class slides
• Know your group project Sheet 1 results and
  understand why book and market values differ
• Understand Baldwin and similar examples