BUSA/ECON 321 REVIEW GUIDE FOR EXAM #1

Text book : Finance: Applications & Theory, 3^rd Edition

ISBN-13:9780-308-10843-8: Published by McGraw Hill Education

BUSA/ECON 321

REVIEW GUIDE

FOR EXAM #1

DUE: FEB. 14 , 12:00AM

1) What is the primary goal of a financial manager?

2) What is agency theory? Agency costs? How can a firm seek to reduce these costs?

3) What are the primary business organization advantages and disadvantages of a sole proprietorship? Of a corporation?

4) What are the two basic types of decisions that a financial manager makes, and relate these two decisions to the general format of a balance sheet?

5) Define: Capital budgeting, working capital management, capital structure or financial structure, cost of capital.

6) What is meant by risk aversion? Do all investors have the same level of risk aversion?

7) What are the primary financial statements generated by a corporation?

8) Be able to compute net income, earnings per share (EPS), determination of

income taxes, and changes in retained earnings.

8) Distinguish between marginal and average corporate tax rates.

9) Name specific connections between the income statement and balance sheet.

11) Define: depreciation expense, accumulated depreciation, A/R, A/P, current

assets, current liabilities, retained earnings, common equity, shareholders’

equity, net worth (book value of equity), cross-sectional analysis, trend

analysis.

12) In financial ratio analysis, what is meant by the statement “The number by

itself is meaningless”? [Refer to Cross-Sectional Analysis and Time-Series

Analysis(or Trend Analysis)]

13) What do each of the categories of ratios measure in general, and what do the

individual ratios in each of the categories measure? Refer to notes from

class, homework, and of course, the textbook.

By “categories”, we mean,

a) Liquidity Ratios

b) Leverage (Debt) Ratios

c) Profitability Ratios

d) Asset Management Ratios

e) Market Value Ratios

14) What is meant by the “tradeoff” between business risk and financial risk?

What is business risk? What is financial risk?

15) What is the difference between a capital market transaction and a money

market transaction?

16) What is the difference between a primary market transaction and a secondary

market transaction?

17) The NYSE and NASDAQ (the OTC market) are examples of capital markets.

What are some major differences between them?

18) Define: Bond, indenture, debenture, mortgage bond, par value, principal, face

value, maturity value, coupon rate, coupon payment, restrictive provisions,

sinking fund requirement, call provision, call protection period, call premium,

trustee, yield to maturity (YTM).

19) How do bond ratings work (i.e., what do they mean, and how are they used)?

20) Define default risk.

21) Define nominal rate of interest and real rate of interest.

22) What are the primary components of a nominal rate of interest?

24) How does the underwriting process work (i.e., discuss the main steps

involved)?

25) Define: investment banker, underwriter, brokerage, prospectus, underwriting

spread, underwriting syndicate, shelf registration, Securities and Exchange

Commission (SEC), underpricing.

26) Concept of risk and return:

a) How do particular provisions of a bond change the required rate of return

on the bond, such as a call provision or a sinking fund requirement?

b) Briefly describe the difference in risk levels between a Treasury security, corporate bond, preferred stock, and common stock, [Assume that the corporate bond, preferred stock and common stock are issued by the same company.]

27) Why would a company want to “call back”, refund, or repurchase one of their

outstanding bond issues?

***Though there may be questions on the use, interpretation and meaning of ratios, there will not be any calculation of ratios on Exam #1.

FOR THE EXAM, you will have access to your notes, book, homework, and calculators.

This review guide may not contain every item on the exam, but these are a list of “must-know”s. You are always responsible for any material in the assigned chapters and covered in lectures. This exam covers chapters 1, 2, 3, 6 and 12 (18).Remember that chapter 12 in our “Select Chapters” version is chapter 18 in the original 3^rd edition.