Study & Review Guide

Exam I - STFM - Chapters 1-3

 

This is a pretty complete but not exhaustive guide to your exam.  Don't forget the BONUS question (short essay) from the article on "Cash Hoarding."

 

Chapter 1:

 

  1. Know the answers to all the assigned end-of-chapter questions.
  2. Know how to calculate the cash collections from sales, as you did in Problem #1.
  3. Why do some companies strive for "zero net working capital" (ZNWC)?  Any pros or cons to this?
  4. BONUS is something like this, but maybe not exactly:  What are the lessons to be learned from the "Cash Hoarding" article? (link is at my website, under STFM)


    Chapter 2:


  5. Be able to calculate and interpret all solvency ratios.
  6. Which is the best solvency ratio, and why?
  7. Be able to tell why solvency, on it own, is not adequate for liquidity management.
  8. Be able to calculate and interpret all "narrow liquidity" measures.
  9. Which is the best "narrow liquidity" ratio, and why?
  10. Be able to calculate and interpret all "how much liquidity is enough" ratios (these combine solvency and narrow liquidity).
  11. Which is the best ratio, of the "how much liquidity is enough" ratios?  Why?
  12. Be able to calculate and interpret sustainable growth rate, along with actual growth rate.  Tell how a company may increase its sustainable growth rate, and which of the ways to increase it are most likely to occur (answer to latter is increasing the D/E ratio; can you say why this is most likely, by thinking about the other levers for increasing sustainable growth?).
  13. Dell Handout:  What is the "Golden Triangle"?
  14. Dell Handout:  In what way(s) has Dell taught business professors how to "do finance"?
  15. Dell Handout:  Who is supplying funds for Dell's operating cycle?  In your opinion, as well as from class discussion, what are the (a) advantages and (b) disadvantages of this?
  16. Would you expect Dell's changing CCP to have created, maintained, or eroded Dells shareholder wealth (and why)?
  17. Dell Handout:  Could the sustainable growth rate be coupled with the "Golden Triangle" to help financial managers set finance policy and guide the business development of their companies?


    Chapter 3:

  18.  What is the difference between the balance sheet approach to STFM decision making and the valuation approach?  Which is preferred? Why?
  19.  Is determining the appropriate discount rate easy for STFM decision making?
  20. Why can we use simple interest calculations and not have to take into account compounding in STFM decision making?
  21. What is the difference between EVA and net income? Related to this, why are so many companies "jumping on the bandwagon" to measure and make decisions based on EVA?
  22. Be able to compute and interpret two years worth of EVA, as we went over in class.
    EVA = Operating Profit(1-T) - (Cost of capital)(Amount of LT Capital)
    where
    Cost of capital is typically WACC or ka