FIN 300 MANAGERIAL FINANCE COMPLETE
STUDY GUIDE WITH SOLVED QUESTIONS
◉ What are Key Issues of Corporate Finance? (2 issues)
Answer: -mismatch between the timing of cash inflows and outflows
-amount and timing of operating cash flows are not known with
certainty
◉ Book Value
Answer: the company's historical value as shown on its financial
statements
Book value does not consider the risk and the earnings capacity of
the assets
◉ Market value
Answer: the current price at which an asset can be bought or sold in
the market place
◉ Intrinsic or Fundamental Value
Answer: estimate of the value an individual buyer places on an asset
A company's intrinsic value is driven by its long-term cash-flow
generating ability
,◉ What is the Key Difference between Book value, mkt value, and
intrinsic value
Answer: Book value is the actual value of the company as shown on
the balance sheet, compared to the mkt value which is the current
price at which the asset can actually be sold, so if an asset is worth
500M on the balance sheet but the asset is now near useless due to
other factors the market value will better reflect that than the book
value will. The intrinsic value is different than the previous two
because it is the value an individual investor places on an asset
compared to the market or what the company values an asset at.
◉ What is an agency relationship?
Answer: The relationship between the shareholders and the
management of a company
◉ What factors can cause conflict between shareholders and
management in an agency relationship?
Answer: 1. Managers will tend to act for their own benefit (bonuses,
power, job security etc.)
2. Managers have inside info about the company unknown to
shareholders (can have managers maximizing their own benefit or
minimizing their losses if the company is doing poorly, typically at
the expense of shareholders)
3. Managers focused on short-term results compared to investors
being focused on long-term growth
,◉ 5 mechanisms to align managers and shareholder values
Answer: 1. Monitoring managerial decisions (outside auditors)
2. Managerial stock based compensation plans (when the company
does well so do they)
3. An effective BOD (to hire and fire managers)
4. The threat of hostile takeovers (to ensure managers focus on the
LT performance of the company or they will be ousted)
5. Strong competition in the manager labor market (threat of
replacement)
◉ What is the difference between the Primary market and the
Secondary market?
Answer: Primary market is the exchange of securites for cash
between the firm and an investor
Secondary market is the exchange of OUTSTANDING securities
between an investor and another investor
◉ What are the main differences between Accounting and Finance?
Answer: Accounting: Focus on NI or Profit, Backward looking,
Measures wealth through accounting gain
Finance: Focus on cash flows, forward looking, maximizes
shareholder value through accepting value-creating investments
, ◉ Three rules of The Time Value of Money
Answer: 1. Only cash flows that occur at the same time can be
compared or combined
2. To move cash forward in time you must compound it
3. To move cash backwards in time you must discount it
◉ In terms of cash, what 3 questions to investors look at when
investing?
Answer: How much cash, how long till they get that cash, how risky
is the cashflows. (How much, how long, how risky)
◉ Future value of money equation
Answer: FVn = PV (1 + i)^n
◉ What is the future value interest factor? (Compound factor)
Answer: (1 + i)^n
◉ Present value of money equation
Answer: PV = FVn * 1/(1 + i)^n
◉ What is the present value interest factor? (discount factor)
Answer: 1/(1 + i)^n
STUDY GUIDE WITH SOLVED QUESTIONS
◉ What are Key Issues of Corporate Finance? (2 issues)
Answer: -mismatch between the timing of cash inflows and outflows
-amount and timing of operating cash flows are not known with
certainty
◉ Book Value
Answer: the company's historical value as shown on its financial
statements
Book value does not consider the risk and the earnings capacity of
the assets
◉ Market value
Answer: the current price at which an asset can be bought or sold in
the market place
◉ Intrinsic or Fundamental Value
Answer: estimate of the value an individual buyer places on an asset
A company's intrinsic value is driven by its long-term cash-flow
generating ability
,◉ What is the Key Difference between Book value, mkt value, and
intrinsic value
Answer: Book value is the actual value of the company as shown on
the balance sheet, compared to the mkt value which is the current
price at which the asset can actually be sold, so if an asset is worth
500M on the balance sheet but the asset is now near useless due to
other factors the market value will better reflect that than the book
value will. The intrinsic value is different than the previous two
because it is the value an individual investor places on an asset
compared to the market or what the company values an asset at.
◉ What is an agency relationship?
Answer: The relationship between the shareholders and the
management of a company
◉ What factors can cause conflict between shareholders and
management in an agency relationship?
Answer: 1. Managers will tend to act for their own benefit (bonuses,
power, job security etc.)
2. Managers have inside info about the company unknown to
shareholders (can have managers maximizing their own benefit or
minimizing their losses if the company is doing poorly, typically at
the expense of shareholders)
3. Managers focused on short-term results compared to investors
being focused on long-term growth
,◉ 5 mechanisms to align managers and shareholder values
Answer: 1. Monitoring managerial decisions (outside auditors)
2. Managerial stock based compensation plans (when the company
does well so do they)
3. An effective BOD (to hire and fire managers)
4. The threat of hostile takeovers (to ensure managers focus on the
LT performance of the company or they will be ousted)
5. Strong competition in the manager labor market (threat of
replacement)
◉ What is the difference between the Primary market and the
Secondary market?
Answer: Primary market is the exchange of securites for cash
between the firm and an investor
Secondary market is the exchange of OUTSTANDING securities
between an investor and another investor
◉ What are the main differences between Accounting and Finance?
Answer: Accounting: Focus on NI or Profit, Backward looking,
Measures wealth through accounting gain
Finance: Focus on cash flows, forward looking, maximizes
shareholder value through accepting value-creating investments
, ◉ Three rules of The Time Value of Money
Answer: 1. Only cash flows that occur at the same time can be
compared or combined
2. To move cash forward in time you must compound it
3. To move cash backwards in time you must discount it
◉ In terms of cash, what 3 questions to investors look at when
investing?
Answer: How much cash, how long till they get that cash, how risky
is the cashflows. (How much, how long, how risky)
◉ Future value of money equation
Answer: FVn = PV (1 + i)^n
◉ What is the future value interest factor? (Compound factor)
Answer: (1 + i)^n
◉ Present value of money equation
Answer: PV = FVn * 1/(1 + i)^n
◉ What is the present value interest factor? (discount factor)
Answer: 1/(1 + i)^n
