First Test - Outline

Your approach to studying for this exam is up to you: you each may have your own ways
of preparing depending upon your background. Below I list the topics we have covered
but first I list my approach to studying for exams.

My rules for preparing for an exam in order of importance

1. Know something well - start with the basic problems and make sure you can identify
which basic formulas to use and how to use them. Don't start studying the more
complicated until you can say "I can solve the basics."

2. Know how to explain the results for basic problems; that is, why you get what you get
as an answer.

3. Start on the more complex problems but don't worry if you don't have enough time to
feel sure you can solve them all. Depending upon your background, you may find these
difficult and time consuming to handle, so don't put a lot of time into them unless you
have done (1) and (2). You may not be able to cover all the difficult areas - but remember
- try to learn the complex problems one at a time. You'll only get frustrated if you try to
learn them all at once. If you don't get through them all, at least you'll know the ones you
studied well and you might get lucky and the others won't be on the exam (but don't
count on it).

4. Know how to explain the results from complex problems. This is the last thing you
might cover.

Major topics covered

Time Value

1. Know how to calculate present and future values of a single cash flow, multiple
cash flows, and annuities. Also combinations of these types of cash flows.

2. Know how to calculate annuity payments.

3. Know how to figure the interest rate (k) from a given present or future value.

4. Know how to find the effective rate of interest.

5. Know how to use continuous compounding and discounting.

Stock and Bond Valuation

1. Know how to calculate the price of a bond given the coupon, required return,
maturity, and par value.

2. Know how to calculate the required return, k, (also called the yield to maturity)
for a bond given the real rate, the expected inflation rate, and the risk
premium (sometimes referred to as the maturity premium).
 3. Know how to calculate the required return for a bond given its coupon, price,
par, and maturity.

4. Know how to handle semi-annual coupon payments.

5. Know how to calculate the present stock price given future dividends and future
stock price.

6. Know how to calculate stock price given its dividend last year or its expected
dividend this year, its expected growth in dividends, and its required return.

7. Know how to calculate an implied growth rate of dividends or implied required

return for a stock. That is, given stock price, the dividend, and dividend growth,
find k.

8. Know how to calculate an actual return from investing; i.e., the return one
realizes given the purchase price, sales price, and cash flows (such as
dividends).

9. Know how to compare stocks based on price/earnings, price/cashflow,

price/book, and price/sales ratios.

Risk

1. Know how to calculate a return .

2. Know how to calculate the mean (expected value), variance, and standard
deviation of one stock’s return and for a portfolio of stocks.

3. Know how to calculate the coefficient of variation.

4. Know what positive, negative and zero correlation means.

5. Know how to use the CAPM [ki = Rf + Betai(Rm - Rf)] to get a required return for
a stock.

6. Know what a beta is and how to calculate it for a single stock and a portfolio of
stocks.

Cost of Capital and Capital Structure Theory

1. Know how to estimate the cost of common equity in three ways (CAPM, dividend
growth model, risk premium) as well as the cost of internally generated and externally
generated common equity.

2. Know how to calculate the cost of debt and prefered stock.

3. Calculate the after-tax weighted average cost of capital

- estimate the after tax cost of each source of capital
- remember to use net proceeds
- calculate the weights to be applied to each source
 n combine

4. Know the two competing theories of optimal capital structure

5. Calculate the value of a levered firm.

-basic method
-Miller's method using stock and bond tax rates

6. Calculate degree of operating , financial and combined leverage (DOL, DFL and
DCL) and interpret.

Finally, you should know how to explain each of the problems. That is, not only show that you know when
to use the formulas, but also how to interpret the results. Complex problems usually involve more than one
basic formula.