Finance & Accounting Sample

UNISEMINAR

Finance and Accounting

Maastricht 2nd Edition Academic Year 12/13


Introduction 003 – 012

1 Capital Markets – Risk & Return 013 – 032 2  Capital Structure 033 – 065 3  Payout Policy 066 – 093

4  Capital Budgeting and Valuation 094 – 119 5  Options 120 – 163

Table of Contents


1 Organizations 164 – 170 2  Financial Statements 171 – 184 3  Transaction Analysis 185 – 196 4  Accrual Accounting 197 – 205 5  Short-‐Term/Trading Investments 206 – 210 6  Receivables 211 – 220 7  Inventory & Cost of Goods Sold 221 – 236 8  Plant Assets and intangibles 237 – 251 9  Current Liabilities 252 – 267 10 The Cash Flow Statement 268 – 278 11 Financial Statement Analysis 279 – 298 Notes, Feedback, Contact

Table of Contents

Finance and Accounting Finance: Chapter 1 – Risk & Return

14 / 298

Name the two different types of risk

-‐ 2 Points -‐

Uniseminar

  FFiirrmm-‐-‐ssppeeccii��iicc risk (also: idiosyncratic, unsystematic, unique or diversi�iable risk)

  SSyysstteemmaattiicc risk (also: undiversi�iable or market-‐risk)

Risk & Return Two types of risk

P. 1


The eexxcceessss rreettuurrnn is the difference between the average return for the investment and the

average return for corporate bonds, which are generally considered to be a risk-‐free

investment.

-‐ True / False -‐

15 / 298

Uniseminar

Risk & Return De�inition Excess Return

FFaallssee.. The excess return is the difference between the average return for the investment and the average return for TTrreeaassuurryy bbiillllss, which are generally considered to be a rriisskk-‐-‐ffrreeee investment

P. 1


16 / 298

What is the bbeettaa?

-‐ De�inition-‐

Uniseminar

The bbeettaa is the expected percent change in the excess return of a security for a 1% change in the excess of the market portfolio.

Risk & Return De�inition of Beta

P. 2


What is the formula for the ccoovvaarriiaannccee?

-‐ Formula -‐

Finance: Chapter 1 – Risk & Return

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Uniseminar

Risk & Return Formula Covariance

P. 3

Cov(Ri,Rj )historical =

11−T

(Ri,t − R∑ i) ⋅ (Rj,t − R j )

T = number of observations, R = return, R = expected return


25 / 298

What is the name of the line with the question mark?

-‐ Graph-‐

Uniseminar

Risk & Return Graph

CCaappiittaall MMaarrkkeett LLiinnee:: The line from the risk-‐free investment through the market portfolio, represents the highest expected return available for any level of volatility.

P. 5

Finance and Accounting Finance: Chapter 2 -‐ Capital Structure

39 / 298

What is the formula for ccoosstt ooff ccaappiittaall ooff lleevveerreedd eeqquuiittyy (when cost of unlevered equity is

known)?

-‐ Formula -‐

Uniseminar

Formula for Cost of Capital of Levered Equity P. 11

Capital Structure

rE = rU +DE(rU − rd )


Firm X has the following capital structure: Debt = 300, Equity = 600. Imagine that the �irm has a

levered cost of equity of 15% and its cost of debt is 6%. What is its unlevered cost of equity?

-‐ Calculation -‐

Finance: Chapter 2 -‐ Capital Structure

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Uniseminar

Capital Structure Calculation unlevered cost of equity

0.15 = x + (300/600) * (x – 0.06) 0.15 + (300/600) * 0.06 = x + (300/600) x 0.18 = 1.5x x = 0.12 The unlevered cost of equity is 12%

P. 11

rE = rU +DE(rU − rd )


Caterpillar has the following properties: Rd = 0.06; Re = 0.10; Rwacc = 0.0797; Cash-‐�low = $4.25 million;

perpetual growth rate = 0.04; D/E ratio= 0.5; τc = 0.35

What is the value of its interest tax shield?

-‐ Calculation -‐

Finance: Chapter 2 -‐ Capital Structure

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Uniseminar

Capital Structure WACC and tax shield calculation

Caterpillar has the following pre-‐tax WACC: Value without the tax shield is: Value with the tax shield is: Value of the tax shield is: 107 – 91 = $16 million

P. 12

rWACC =E

E +DrE +

DE +D

rD ⋅ (1−τC ) =1

1+ 0.50.10+ 0.5

1+ 0.50.06 = 0.0867

VU =4.25

0.0867− 0.04= 91

V L =4.25

0.0797− 0.04=107

Finance and Accounting Finance: Chapter 2 -‐ Capital Structure

49 / 298

Fill in the blanks for A, B, C, D, E

-‐ Graph -‐

Cost of Equity (rE)

Cost of Debt (rD)

Pre-‐tax WACC(rWACC=rU=rA)

Cost of Capital

Debt-‐to-‐Value Ratio (D/(D+E))

50% 100%

Cost of Equity (rE)

Cost of Debt (rD)

Pre-‐tax WACC

Due to interest tax shield

10%

20%

30%

40%

0%

10%

20%

30%

40%


50% 100%0%

A A

B B

C C

D

E

Uniseminar

Capital Structure Graph illustrating the change in WACC with and without taxes

A = Cost of Equity B = Pre-‐tax WACC C= Cost of Debt D = WACC with taxes E = Change in WACC due to interest tax-‐shield

P. 13

Cost of Equity (rE)

Cost of Debt (rD)

Pre-‐tax WACC(rWACC=rU=rA)

Cost of Capital


50% 100%

Cost of Equity (rE)

Cost of Debt (rD)

Pre-‐tax WACC

Due to interest tax shield

10%

20%

30%

0%

10%

20%

30%


50% 100%0%


The following �igure shows the alternatives a �irm has to

ddiissttrriibbuuttee iittss ffrreeee ccaasshh ��llooww. Fill in the boxes.

-‐ Figure -‐

Finance: Chapter 3 – Payout Policy

67 / 298

Retain Pay Out

Invest in New Projects

Increase Cash

Reserves

Repurchase Shares

Pay Dividends

Free Cash Flow

A B

C D E F

Uniseminar

Payout Policy Uses of Free Cash Flow

P. 16

Retain Pay Out

Invest in New Projects

Increase Cash

Reserves

Repurchase Shares

Pay Dividends

Free Cash Flow


What items does the bbaallaannccee sshheeeett report?

-‐ 3 Points -‐

Accounting: Chapter 2 – Financial Statements

175 / 298

Uniseminar

The bbaallaannccee sshheeeett shows the �inancial position of a company at a speci�ic point of time. It reports 33 iitteemmss:   AAsssseettss   LLiiaabbiilliittiieess   ((SSttoocckkhhoollddeerrss’’)) EEqquuiittyy

Financial Statements Balance Sheet Items

P. 42


Illustrate the rules of debit and credit by putting the arrows ( ) in the right direction and choosing between +/-‐ for the three types of

balance sheet items:

-‐ Graph -‐

Accounting: Chapter 3 – Transaction Analysis

190 / 298

AAsssseettss == LLiiaabbiilliittiieess ++ SShhaarreehhoollddeerr´́ss EEqquuiittyy

DDeebbiitt ((++//-‐-‐)) CCrreeddiitt ((++//-‐-‐)) DDeebbiitt ((++//-‐-‐)) CCrreeddiitt ((++//-‐-‐)) DDeebbiitt ((++//-‐-‐)) CCrreeddiitt ((++//-‐-‐))

Uniseminar

Transaction Analysis The Rules of Debit and Credit

The rules of debit and credit are illustrated in the following exhibit:

P. 46

AAsssseettss == LLiiaabbiilliittiieess ++ SShhaarreehhoollddeerr´́ss EEqquuiittyy

DDeebbiitt ((++)) CCrreeddiitt ((-‐-‐)) DDeebbiitt ((-‐-‐)) CCrreeddiitt ((++)) DDeebbiitt ((-‐-‐)) CCrreeddiitt ((++))

Finance and Accounting Accounting: Chapter 7 – Inventory & Cost of Goods Sold

228 / 298

The following exhibit illustrates FIFO and LIFO under increasing and decreasing costs. Fill in the blanks.

-‐ Graph -‐

Time

Cost €

FIFO

Time

Cost €

Time

Cost €

Time

Cost €

A) Increasing Cost

B) Decreasing Cost

LIFO

A. Increasing/Decreasing Costs

B. Increasing/Decreasing Costs

C. FIFO/LIFO D. FIFO/LIFO

Uniseminar

Inventory & Cost of Goods Sold Graph -‐ FIFO vs. LIFO with Increasing/Decreasing Costs

The following graph illustrates the COGS and Ending inventory under FIFO or LIFO with increasing or decreasing costs.

P. 62

Time

Cost €

FIFO

Time

Cost €

Time

Cost €

Time

Cost €

A) Increasing Cost

B) Decreasing Cost

LIFO


Fill in the correct terminology for X (e.g. depreciation).

-‐ Table -‐

Accounting: Chapter 8 – Plant Assets and Intangibles

239 / 298

AAsssseett AAccccoouunntt ((BBaallaannccee SShheeeett)) RReellaatteedd EExxppeennssee AAccccoouunntt ((IInnccoommee ssttaatteemmeenntt))

PPllaanntt AAsssseettss

Free Hold Land X

Leasehold Land X

Buildings, Machinery, and Equipment X

Furniture and Fixtures X

Land Improvements X

Natural Resources X

IInnttaannggiibblleess with �inite useful lives X

IInnttaannggiibblleess with inde�inite useful lives X

Uniseminar

Plant Assets and Intangibles Plant Assets Terminology

The correct terminology per asset is:

P. 64

AAsssseett AAccccoouunntt ((BBaallaannccee SShheeeett)) RReellaatteedd EExxppeennssee AAccccoouunntt ((IInnccoommee ssttaatteemmeenntt))

PPllaanntt AAsssseettss

Free Hold Land None

Leasehold Land Depreciation

Buildings, Machinery, and Equipment Depreciation

Furniture and Fixtures Depreciation

Land Improvements Depreciation

Natural Resources Depletion

IInnttaannggiibblleess with �inite useful lives Amortization

IInnttaannggiibblleess with inde�inite useful lives None


What are the formulas for hhoorriizzoonnttaall and vveerrttiiccaall aannaallyyssiiss?

-‐ 2 Formulas -‐

Accounting: Chapter 11 – Financial Statement Analysis

281 / 298

Uniseminar

Vertical analysis:

Financial Statement Analysis Formula – Horizontal and Vertical Analysis

P. 73

Horizontal analysis:

Percentage Change = Dollar amount of changeBase year amount

Vertical analysis income statement = Financial statement item (e.g. income statement item)Base value (e.g. total revenue)

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Finance & Accounting Sample