Weiners Model

First Exam Review Notes

The list of topics below are NOT meant to be exhaustive nor should they be your ONLY focus for the exam. They represent areas that one should be familiar with for the exam.

For some of you, the material n the first three chapters will be a review.

Chap. 1.

Ð'* Understand the nature of the conflict that exists between shareholders and management. The role of the board of directors, etc.

Ð'* What is the goal of financial management?

Ð'* Advantages & disadvantages of the three corporate forms.

Chap. 2.

Ð'* Know the relationship between the balance sheet and the income statement in terms of sales growth. Your book does not explicitly state this relationship. So here it is: That is, liabilities finance assets & equity finances assets. Assets are used to generate sales. In generating sales we create expenses. We want sales to be greater than expenses leading to net income. Net Income is then closed out to retained earnings and the process begins the next operating cycle.

Ð'* Know the equations for the balance sheet and the income statement.

Ð'* Know which accounts are on each of the statements.

Ð'* Know the relationship between the right-hand side and left-hand of

the balance sheet. The left-hand side is used to finance the right-hand

Ð'* side. In other words, liabilities and equity are used to finance assets.

Ð'* One should be able to calculate cash flow from assets as noted in text. This is also called Free Cash Flow (FCF) a very important cash flow concept in finance.

Chap. 3.

Ð'* Understand sources of cash and uses of cash in the context of the statement of cash flows. And, how it relates back to the cash account on the balance sheet

Ð'* One should know the three segments of the statement of cash flows and their purpose.

Ð'* What are common size financial statements and what purpose do they serve?

Ð'* Understand and explain the concept of working capital beyond the usual: current assets minus current liabilities.

Ð'* Explain the impact of current assets ( A/R & Inv.) on working capital.

FYI: Working capital is the cash a firm needs to have on-hand to run its daily operations. It is a cost to the firm because it is an investment in the firm. For example, the firm must invest in its employees by meeting payroll every week, it is unlikely that if employees are not paid that they will be willing to work for free. Similarly, the payment of rent, utilities, etc. all require an investment of working capital.

Ð'* For the ratios, it is expected that many of you will be able to calculate these ratios using information given and the formulas. However, you are going to required to interpret a series of ratios that "paint" a picture of a firm's financial condition.

Chap. 4.

Ð'* Explain the importance of financial planning to an organization.

Ð'* What are some factors to consider and why are they important?

Ð'* What is the percentage of sales method? Why use "sales?"

Ð'* Be able to use the percentage of sales method to develop pro-forma financial statements and find the external financing needed ( EFN)?

Ð'* Be able to adjust for fixed asset capacity in developing pro-forma financial statements.

Ð'* Be able to calculate and interpret SGR and IGR.

Chap. 5.

Ð'* Understand the difference between compounding and discounting in terms as increasing /decreasing r and t and the impact of PV and FV.

Note: In today's business finance parlance, the finding of present values is called often called discounted cash flow (DCF) valuation.

Ð'* Why is simple interest different than compound interest? However, a simple interest loan is the best type of loan a consumer can get because it allows for the complete amortization of the loan based on a fixed payment stream ( i.e. mortgage, car loan) . Why? You should be able to answer such a question.

Ð'* Find t and r

Chap. 6.

Note: Chap. 5 looked at lump sum amounts, in Chap. 6 we look at a series of cash flows over time.

Ð'* Find PV and FV of multiple cash flows.

Ð'* Understand (conceptually) and be