FRL 300 Managerial Finance I

Spring 2015 Midterm Exam 2 Study Guide

Coverage: Chapters 6-7-8
Time: May 28th, 2015
Things to bring: Scantron, pencil, eraser and one of the following three financial
calculators:
Texas Instrument BA II Plus
HP 12c
HP 10b
Other types of calculators are not allowed during the exam.
PLEASE NOTE:

: understand concept (conceptual)

! : calculate (computational)

Chapter 6: Multi-Period Cash Flows and Discounted Cash Flow Analysis

Read all slides of chapter 6, be able to solve all examples on the slides.
1. The future value of multiple cash flows (!):HW4Q2
2. The present value of multiple cash flows (!):HW4Q1, video link on slide 5, Clicker #1
3. Annuity (and annuity due) and perpetuity :
An ordinary annuity versus an annuity due ():HW4Q12, Q13
A perpetuity as a special case of an annuity (): Chapter 6 slide 12, Clicker #2,3
4. Annuity and perpetuity values:
Present value and future values for ordinary annuity (!):HW4Q4, Q11, video link on
slide 17, Clicker #4,5
The present value of a level perpetuity (!):HW4Q5
The implied interest rates in a series of annuity cash flows (!): Chapter 6 slide 25,
Clicker #7
Annuity payment (!):HW4Q3, Q9, Clicker #6
Number of payments required to pay off a loan (!):HW4Q10, Chapter 6 slide 24
5. The effective annual rate (EAR) and the annual percentage rate (APR):
The APR given the EAR (!): Chapter 6 slide 40
The EAR given the APR (!):HW4Q6, Q7, Q8, Clicker #8
The use of APR versus EAR ():HW4Q7, Q8
6. Examine the payment patterns of different loan types: Read slide 42
Interest-Only Loans ()
Amortized Loans ()
Discount Loans ()

Chapter 7: Bonds and Bond Valuation

Read all slides of chapter 7, be able to solve all examples on the slides.
1. Bond Terminology: See slides
Bond Definition ()
The nature of the bondholders claim on the assets and income of the firm ()
Meaning of par value, coupon interest rate, maturity, current yield and YTM ():
HW5Q1, Clicker #1
2. Bond Valuation:
Bond values with annual coupon and semiannual coupon payment (!):HW5Q3, video
links on slides 6, 17, Clicker #2, 3
YTM (bond yields) (!): HW5Q4, video link on slide 24, Clicker #5
Bond coupon payments, coupon rate (!): HW5Q5, Q8
Important relationships relating to bond valuation:
o Changes in market interest rate (required return) and bond values. ():HW5Q2,
Clicker #4
o The relationships between coupon rate and YTM for premium bond, par bond and
discount bond (): HW5Q10, slide 15
3. Bond Indenture: See slides 29, 30 and read corresponding section in the book
Bond indenture ()
Contents of bond indenture:
o Issue Date and Maturity Date; Coupon Rate and Frequency of Coupon Payment
()
o Repayment (Sinking Fund) Provision ()
4. Types of Bonds: see slides 31-34
Classified by issuer:
o Federal Government Bonds, State and Local Government Bonds (Munis), and
Corporate Bonds ():Clicker #6
o The after-tax returns on Corporate bonds versus Munis (;!): HW5Q11
Classified by Pattern of Cash Flow and Repayment of Principal:
o Zero Coupon Bonds ():
o Interest Only Bonds ()
o Amortizing Bonds ()
o Discount Interest Bonds/Bills ()
5. Real versus Nominal Interest Rates:
The relationship between inflation and interest rates ():Clicker #7
Exact versus approximate Fisher Effect
o Real interest rate (!): HW5Q6, Q9
o Nominal interest rate (!):
o Expected inflation rate (!): HW5Q7, Clicker #8
6. The term structure of interest rates and the yield curve (): slides 41-43

Chapter 8: Stocks and Stock Valuation

Read all slides of chapter 8, be able to solve all examples on the slides.
1. Features of Common Stock (): slide 33-34
2. Features of Preferred Stocks (Compare preferred stock with common stock) (): slide 35
3. Common Stock Valuation:
Valuing stock with simplifying assumptions about the pattern of future cash flows:
(!): slides 7-12
o The stock price for zero growth case (!): slide 15, HW6Q7
o The stock price for constant growth case (!): slide 16-24, HW6Q1, Q4, Q11,
Clicker #1
o The stock price for non-constant and supernormal growth cases (!): slide 26-28,
HW6Q8, 9,10, Clicker #2, Video link on slide 26
4. Estimating the expected return on a stock:
The expected return using the dividend growth model (!): slide 30-31, HW6Q2,
Q3,Q5,Q6, Clicker #3