FIRE 312Mid Term Review Guide:Chapter 1:1) Primary goal of a business

A fundamental assumption underlies the theory of financial management: Management has one basic, overriding goalto create value for stockholders.2) Value of business enterprises Key Financial metric which drives value vs manner in which businesses achieve that metric.

3) Distinguish between Enterprise Value & Shareholder Value

4) Features of business entities

a. Proprietorship

b. Partnership (General vs Limited)

c. Professional Partnership

d. LLC

e. Corporation (S Corporation vs C Corporation

5) Types of claims against CorporationsTheir cost relative to the cost of CS:a. Senior Debt

b. Junior Debt

c. Preferred Stock

d. Common Stock

e. Hybrids

6) Financial Markets Private vs Public, Exchanges vs Over the Counter, Physical vs Virtual

7) Financial Institutions Be able to describe major US Financial Institutions Types1) Be able to give a concise description of the Capital Asset Pricing Model (CAPM)

2) Be able to discuss the methods of calculating Beta.

3) Be able to explain the Security Market Line Concept.

4) Be able to calculate risk premiums for a stock, given its Beta & the Market Risk Premium.

5) Be able to explain the influence of interest rate changes & changes in risk aversion on the Security Market Line.

6) Be able to define the return on an equity security (Common Stock) for a 1 year holding period.

7) Be able to explain why models explaining investor behavior are relevant in determining cost of capital for corporations.8) Be able to explain why determining the cost of equity capital is so critical in Corporate Finance.9) Explain the process of portfolio diversification. What are the statistical characteristics of a well-diversified portfolio?

10) Be able to discuss the differences between standalone risk & portfolio risk. What are the basic ways of measuring standalone risk & contribution to portfolio risk for an individual investment opportunity.

11) Why are co-variances important in evaluating investment risk?

12) Be able to explain the intuition behind the risk/return relationship. How is the risk/return relationship important in financial decision making & financial analysis?

13) What are the factors which ultimately determine the intrinsic & long term market value of a corporation?

14) What two metrics should corporations focus on to maximize long term value?

1) Be able to describe the Dividend Yield + Growth Rate or DCF approach to estimating cost of equity capital.

2) Be able to set up the equations for basic time value of money questions, including bond valuation.3) Be able to identify the most common source of growth capital for mature corporations.

4) Be able to discuss the methodologies used to value bonds & to choose the proper discount rate for valuation (ie, yield curves to take account of maturity risk, corporate yield curves) & how call options & conversion options are accounted for in the valuation process.5) Be able to discuss & use the basic common stock valuation methods dividend discount, dividend plus growth, price earnings ratio method & cash flow based methods.

6) Be able how CAPM can be used in common stock valuation.