FINC6352 Final Exam Review

Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows

1. Understand capital budgeting and the difference between independent projects and mutually
exclusive projects.
2. How to compute the payback period and discounted payback period for a project? Understand
their strengths and weaknesses.
3. How to calculate NPV? Understand the rationale for the NPV method.
4. How to define IRR? How to find IRR? Understand the rationale for the IRR method.
5. Understand NPV profiles. Why can NPV profiles cross over? Why can we obtain conflicting
decisions when using NPV and IRR for some mutually-exclusive projects?
6. How to compute MIRR? What are the advantages of MIRR compared to IRR?
7. Understand normal cash flows, non-normal cash flows, and multiple IRR problems.
8. How to calculate Profitability Index (PI)?
9. How to compare two mutually-exclusive projects with unequal lives using the replacement chain
approach and EAA approach.
10. Understand the economic life of a project and optimal capital budgeting.
Chapter 11: Cash Flow Estimation and Risk Analysis
1. How to identify the relevant cash flows for a project?
2. How to calculate the free cash flows for a project?
3. How to handle interest expense/dividends, sunk costs, opportunity costs, and externalities for a
new project?
4. How to determine the depreciation basis for a project? How to calculate annual depreciation
expenses?
5. How to handle the depreciation if we terminate a project before the asset is fully depreciated?
6. Understand the stand-alone risk, corporate risk, and market risk for a project?
7. How to conduct sensitivity analysis and scenario analysis for a project?
Chapter 12: Corporate Valuation and Financial Planning
1. Understand the purpose of financial planning and forecasting.
2. What is Additional Financing Needed (AFN)? What is the AFN equation?
3. Understand the key assumptions of the AFN equation and the definitions of the variables in the
equation.
4. Know how to use the AFN equation to calculate AFN.
5. How to estimate the self-support growth rate g.
6. How to project balance sheet and income statement using the Percent of Sales method?

7. How to identify and eliminate financing surplus or deficit?

8. What is financing feedback? How to solve the financing feedback problem?
Chapter 7: Free Cash Flow Model (pp.304~pp.310)
1. Understand the classifications of operating assets and non-operating assets.
2. Understand total corporate value and corporate claims.
3. How to use the free cash model to find a firm value?
4. How to calculate expected free cash flows in a firm? How to calculate the changes in total
operating capital?
5. Hot to find a firm value using the constant growth model? How to find the value of common
equity?
6. How to find firm value using the non-constant growth model? What is horizon value?
7. Compare the dividend growth model and the free cash flow model.
Chapter 14: Distributions to Shareholders: Dividends and Repurchases
1. Understand cash distribution policy.
2. Understand three dividend theories about the level of dividend payments. Any implications to
financial managers?
3. Understand clientele effects and the information content of dividend policies.
4. Understand residual distribution model and know how to use the model for the calculation of
dividend payments.
5. Understand stock repurchase, the advantages and disadvantages of the cash distribution policies.
6. Understand Stock dividends and stock splits? How to calculate the new stock price after stock
dividends/split?
Chapter 15: Capital Structure Decisions
1. Understand the effects of additional debt on WACC, free cash flows, agency costs; understand
asymmetric information, signaling theory, and trade-off theory.
2. Understand business risk and financial risk. How to measure these two kinds of risks?
3. How to calculate a firms operating break-even point?
4. For an unleveraged or a leveraged firm, how to calculate the NI, ROE, total payments to
investors? Whats the difference? Whats the source of differences?
5. Understand the assumptions of MM capital structure theory.
6. How to use Hamada equation and CAPM to estimate the unlevered beta, levered beta, and the
cost of equity?
Chapter 16: Working Capital Management
1. Understand three types of WC definitions.

2. How to calculate inventory conversion cycle, DSO, payables deferral periods, and CCC? How to
improve the CCC of a firm?
3. Understand the motivations and goal of cash management. How to minimize cash holdings in a
company?
4. How to conduct cash budget? How to handle depreciation, interest payments, and bad debt in a
cash budget process?
5. Understand the basic concepts about inventory management, accounts receivables, accruals,
credit policy, and trade credit (Acc. Payables).
6. How to calculate total trade credit, free trade credit, costly trade credit, the nominal cost of the
costly trade credit, and its EAR?
7. Know three types of WC financing. What are the differences?
8. Know short-term financing, bank loans, and commercial papers.
9. How to calculate the real cost of debt to a company if the company is required to deposit some
compensating balance? How to calculate the real cost of debt to a company if the company
borrows money under a line of credit in a bank?