FINANCE 614
Financial Management of the Firm
FINAL
I. Definitions. Define any 10 terms, and provide examples.
Risk Beta Market premium
Capital structure Preemptive rights Dividend yield
Flotation costs Dividend ex dividend
Repurchase Required return Recapitalization
Stock splits Expected return Operating working
Dividend payout cash conversion cycle capital
Free Cash Flow Market risk premium
II. Essay Questions. Answer the question below. Please be sure to complete all parts of the question.
1. a) What is Weighted Average Cost of Capital ?
Explain and derive each component part.
b) Utilizing the company that you have analyzed, estimate its WACC.
c) What is capital budgeting ?
d) What is a target capital structure ?
e) Derive the Net Present Value methodology of capital budgeting, and explain the use of WACC.
III. Additional Essay Questions. Answer any two questions. Please be sure to complete all parts of each question that you select.
1. Regarding equities (stock):
a. What is stand-alone risk ?
b. How is it measured ? Create an example and compute the risk
measurement.
c. What is market risk ?
(1) What is the connection of a stock to market risk ?
(2) Define and provide the formula to determine a stock’s market
risk.
2. a) What is an Investment portfolio ?
b) Using historical data: create a portfolio, and solve for the portfolio’s
average, annual return.
[Suggestion: Pick 4 – 10 different companies to comprise the
portfolio].
c) How would we measure the risk of the PORTFOLIO /
d) What is the conclusion of the Capital Asset Pricing Model with regard
to a portfolio ?
What are the important conclusions that this model offers
regarding investment portfolios ?
3. a) Why must working capital be “managed” ?
b) What is (are) the goal(s) of working capital management ?
c) Create an example and explain the Cash Budget.
d) How is a Cash Budget distinct from an Income Statement ?
e) What are some techniques that a company may undertake to
improve its working capital position ?
