Business Finance 

ePrep Course by NTU for University Preparation

– Learning Contents

1. An Overview of Financial Management.

  • Explain the role of finance and the different types of jobs in finance.
  • Identify the advantages and disadvantages of different forms of business organization.
  • Explain the links between stock price, intrinsic value, and executive compensation.
  • Identify the potential conflicts that arise within the firm between stockholders and managers and between stockholders and bondholders, and discuss the techniques that firms can use to mitigate these potential conflicts.
  • Discuss the importance of business ethics and the consequences of unethical behavior.

2. Financial Markets and Institutions, incorporating Singapore Stock Markets and SGX.

  • Identify the different types of financial markets and financial institutions, and explain how these markets and institutions enhance capital allocation.
  • Explain how the stock market operates, and list the distinctions between the different types of stock markets.
  • Explain how the stock market has performed in recent years.
  • Discuss the importance of market efficiency, and explain why some markets are more efficient than others.
  • Develop a simple understanding of behavioral finance.

3. Financial Statements, Cash Flow, and Taxes.

  • List each of the key financial statements and identify the kinds of information they provide to corporate managers and investors.
  • Estimate a firm’s free cash flow and explain why free cash flow has such an important effect on firm value.
  • Discuss the major features of the federal income tax system.

4. Analysis of Financial Statements.

  • Explain what ratio analysis is.
  • List the five groups of ratios and identify, calculate, and interpret the key ratios in each group.
  • Discuss each ratio’s relationship to the balance sheet and income statement.
  • Discuss why return on equity (ROE) is the key ratio under management’s control and how the other ratios impact ROE, and explain how to use the DuPont equation for improving ROE.
  • Compare a firm’s ratios with those of other firms (benchmarking) and analyze a given firm’s ratios over time (trend analysis).
  • Discuss the tendency of ratios to fluctuate over time (which may or may not be problematic); explain how they can be influenced by accounting practices as well as other factors; and explain why they must be used with care

5. Time Value of Money.

  • Explain how the time value of money works and discuss why it is such an important concept in finance.
  • Calculate the present value and future value of lump sums.
  • Identify the different types of annuities, calculate the present value and future value of both an ordinary annuity and an annuity due, and calculate the relevant annuity payments.
  • Calculate the present value and future value of an uneven cash flow stream.  You will use this knowledge in later chapters that show how to value common stocks and corporate projects.
  • Explain the difference between nominal, periodic, and effective interest rates.  An understanding of these concepts is necessary when comparing rates of returns on alternative investments.
  • Discuss the basics of loan amortization and develop a loan amortization schedule that you might use when considering an auto loan or home mortgage loan.

6. Financial Planning and Forecasting.

  • Discuss the importance of strategic planning and the central role that financial forecasting plays in the overall planning process.
  • Explain how firms forecast sales.
  • Use the Additional Funds Needed (or AFN) equation and discuss the relationship between asset growth and the need for funds.
  • Explain how spreadsheets are used in the forecasting process, starting with historical statements, ending with projected statements, and including a set of financial ratios based on those projected statements.
  • Discuss how planning is an iterative process.

7. Interest Rates.

  • List the various factors that influence the cost of money.
  • Discuss how market interest rates are affected by borrowers’ need for capital, expected inflation, different securities’ risks, and securities’ liquidity.
  • Explain what the yield curve is, what determines its shape, and how you can use the yield curve to help forecast future interest rates.

8. Risk and Rates of Return.

  • Explain the difference between stand-alone risk and risk in a portfolio context.
  • Describe how risk aversion affects a stock’s required rate of return.
  • Discuss the difference between diversifiable risk and market risk, and explain how each type of risk affects well-diversified investors.
  • Describe what the CAPM is and illustrate how it can be used to estimate a stock’s required rate of return.
  • Discuss how changes in the general stock and bond markets could lead to changes in the required rate of return on a firm’s stock.
  • Discuss how changes in a firm’s operations might lead to changes in the required rate of return on the firm’s stock.

9. Bonds and Their Valuation.

  • Identify the different features of corporate and government bonds.
  • Discuss how bond prices are determined in the market, what the relationship is between interest rates and bond prices, and how a bond’s price changes over time as it approaches maturity.
  • Calculate a bond’s yield to maturity and yield to call if it is callable, and determine the “true” yield.
  • Explain the different types of risk that bond investors and issuers face, and discuss how a bond’s terms and collateral can be changed to affect its interest rate.

10. Stocks and Their Valuation.

  • Discuss the legal rights of stockholders.
  • Explain the distinction between a stock’s price and its intrinsic value.
  • Identify the two models that can be used to estimate a stock’s intrinsic value:  the discounted dividend model and the corporate valuation model.
  • List the key characteristics of preferred stock, and describe how to estimate the value of preferred stock.

11. The Cost of Capital.

  • Explain why the weighted average cost of capital (WACC) is used in capital budgeting.
  • Estimate the costs of different capital components—debt, preferred stock, retained earnings, and common stock.
  • Combine the different component costs to determine the firm’s WACC.

12. The Basics of Capital Budgeting.

  • Discuss capital budgeting.
  • Calculate and use the major capital budgeting decision criteria, which are NPV, IRR, MIRR, and payback.
  • Explain why NPV is the best criterion and how it overcomes problems inherent in the other methods.

13. Cash Flow Estimation and Risk Analysis.

  • Identify “relevant” cash flows that should and should not be included in a capital budgeting analysis.
  • Estimate a project’s relevant cash flows and put them into a time line format that can be used to calculate a project’s NPV, IRR, and other capital budgeting metrics.
  • Explain how risk is measured, and use this measure to adjust the firm’s WACC to account for differential project riskiness.
  • Correctly calculate the NPV of mutually exclusive projects that have unequal lives.

14. Real Options and Other Topics in Capital Budgeting.

  • Explain what real options are, how they influence capital budgeting, and how they can be analyzed.
  • Discuss how projects’ NPVs are affected by the size of the firm’s total capital budget, the process involved in determining a firm’s capital budget, and the analysis undertaken in selecting value-maximizing projects.
  • Describe the post-audit, which is an important part of the capital budgeting process, and discuss its relevance in capital budgeting decisions.

15. Capital Structure and Leverage.

  • Explain why there may be differences in a firm’s capital structure when measured on a book-value basis, a market-value basis, or a target basis.
  • Distinguish between business risk and financial risk, and explain the effects that debt financing has on the firm’s expected return and risk.
  • Discuss the analytical framework used when determining the optimal capital structure.
  • Discuss capital structure theory, and use it to explain why firms in different industries tend to have different capital structures.

16. Distributions to Shareholders: Dividends and Share Repurchases.

  • Explain why some investors like the firm to pay more dividends while other investors prefer reinvestment and the resulting capital gains.
  • Discuss the various trade-offs that companies face when trying to establish their optimal dividend policy.
  • Differentiate between stock splits and stock dividends.
  • List the advantages and disadvantages of stock repurchases vis-à-vis dividends from both investors’ and companies’ perspectives.

17. Working Capital Management.

  • Explain how different amounts of current assets and current liabilities affect firms’ profitability and thus their stock prices.
  • Explain how companies decide on the proper amount of each current asset—cash, marketable securities, accounts receivable, and inventory.
  • Discuss how the cash conversion cycle is determined, how the cash budget is constructed, and how each is used in working capital management.
  • Discuss how companies set their credit policies, and explain the effect of credit policy on sales and profits.
  • Describe how the costs of trade credit, bank loans, and commercial paper are determined, and how that information impacts decisions for financing working capital.
  • Explain how companies use security to lower their costs of short-term credit.

18. Derivatives and Risks Management

  • Identify the circumstances in which it makes sense for companies to manage risk.
  • Describe the various types of derivatives and explain how they can be used to manage risk.
  • Value options using the Binomial and Black-Scholes Option Pricing Models.
  • Discuss the various elements of risk management and the different processes that firms use to manage risks.

19. Multinational Financial Management.

  • Identify the primary reasons companies choose to go “global.”
  • Explain how exchange rates work and interpret different exchange rate quotations.
  • Discuss the intuition behind interest rate parity and purchasing power parity.
  • Explain the different opportunities and risks that investors face when they invest overseas.
  • Identify some specific challenges that a multinational corporation faces and discuss how they influence its capital budgeting, capital structure, and working capital policies.

20. Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles.

  • Identify the basic features of preferred stock and explain its advantages and disadvantages.
  • Differentiate among the types of leases, discuss the financial statement effects of leasing, and evaluate a lease.
  • Explain what warrants are, how they are used, and analyze their cost to the firm.
  • Explain what convertibles are, how they are used, and analyze their cost to the firm.

21. Mergers and Acquisitions.

  • Identity the different types of mergers and the various rationales for mergers.
  • Conduct a simple analysis to evaluate the potential value of a target firm and discuss the various considerations that influence the bid price.
  • Explain whether the typical merger creates value for the participating shareholders.
  • Discuss the value of other transactions such as leveraged buyouts (LBOs), corporate alliances, and divestitures.

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