1) Summarize the importance of the company's finances, role of the financial manager and tasks.

 Company's finances:
o How much short-term cash flow does a firm need to pay its bills?
o Which long-term investments should the firm involve in?
o How can the firm collect the money for the required investments?
 Role of The Financial Manager:

 Tasks:
o Involved in financial policy, planning and monitoring the work of all financial staff.
o Always in contact with the CEO & top management.
o The most important financial voice in the firm to explains earnings results and forecasts to investors and the media.
2) Write down, the Balance-Sheet Model of the Firm (capital budgeting and structure decisions, Net Working Capital
investment decision).

3) What is the contact between the Firm and the Financial markets?
4) How can we calculate Present Value (PV), Net Present Value (NPV) and Rate of return? Write down definitions and forms!
What are the Net Present Value and Rate of Return Rules?
 PV: Today’s value of a future cash flow (PV = C t / (1+r)t)
 NPV: PV – Required Investment (NPV = C0 + Ct / (1+r)t)  Accept investments that have positive net present value.
 Rate of Return: The annual income from an investment expressed as a percentage of the original investment.
(Return = Profit / Investment)  Accept investments that offer rates of return higher than their opportunity cost of capital.
5) What does it mean Discount Factor (definition)? How to calculate Discount Factor?
 Present value of a $1 future payment, DF = (1 / (1+r) t)
6) What is the different between nominal and real interest rate? How can we calculate the real interest rate?
 Nominal Interest Rate: Rate at which money invested grows.
 Real Interest Rate: Rate at which the purchasing power of an investment grows.
 1 + Real interest rate = (1 + Nominal interest rate) / (1+ Inflation rate) OR = Nominal rate - Inflation rate
7) What does it mean Opportunity Cost of Capital?
 It is the rate of return which can be earned by investing the same money into a different investment with equal risk. Thus,
it’s the difference between the returns on the two projects.
8) How to calculate Value Perpetuities?
 In General: PV = Cash Flow / Discount Rate
 In Common Stock: P0 = Div / r = EPS / r
9) What is the dividend?
 Periodic cash distributed by the firm to the shareholders.
10)What is the book value?
 Firm’s net worth as per the balance sheet.
11) What is the Liquidation Value?
 Net amount that would be collected by selling the firm’s assets and paying off its creditors.
12) What is the market capitalization rate? How can we calculate Expected return?
 The percentage yield that an investor expects from a specific investment over a specific of time.
 Expected Return = (Div1 + P1 - P0) / P0
13) What is the Payout Ratio and Plowback Ratio? What is the contact between two ratios?
 Payout Ratio: Fraction of earnings paid out as dividends.
 Plowback Ratio: Fraction of earnings hold by the firm.
 Payout Ratio + Plowback Ratio = 1
14) What does it mean Book Rate of Return? How to calculate Book Rate of Return?
 Average income divided by average book value over project life. Also called accounting rate of return.
 Book Rate of Return = Book Income / Book Assets.
15) Write down, Internal Rate of Return pitfalls?
 Lending or Borrowing:
o With some cash flows the NPV of the project increases as the discount rate increases.
 Multiple Rates of Return:
o Certain cash flows can generate NPV=0 at two different discount rates.
 Mutually Exclusive Projects:
o IRR sometimes ignores the magnitude of the project.
 Term Structure Assumption:
o We assume that discount rates are stable during the term of the project.
o This assumption implies that all funds are reinvested at the IRR.
o This is a false assumption.
16) What does it mean Profitability Index?
 (PI) It provides a tool for selecting among various projects combinations and alternatives.
 The highest weighted average PI can indicates projects to select.
17) What is the Measuring risk? How to calculate Variance and Standard Deviation?
 Strategy designed to reduce risk by spreading the portfolio across many investments.
 Variance: Average of Squared Deviations = (ṝ m – rm)2
 Standard Deviation = (Variance (ṝm)).5
18) What is the Risk Premium?
 It’s a compensation for investors who tolerate extra risk, compared to a risk-free investment.
 Sharp ratio = Risk premium / Standard deviation = (r – r f) / σ
19) How Diversification Reduces Risk (market and unique risk)?
 Diversification reduces the risk by spreading the portfolio across many investments.
 Unique Risk: Risk factors affecting only that firm. Also called “diversifiable risk.”
 Market Risk: Risk factors affecting the overall stock market Also called “systematic risk.”
20) What is the market portfolio? What will show you beta and how to calculate beta?
21) Write down, why important the liquidity ratio. What is the different between different liquidity ratios?
22) Write down, why important the profitability ratio and describe the profitability ratios (Operating profit margin, ROE, ROA, other
ratios)?
23) Why important to speak about financial planning? What is the different between short term and long term financial
planning (aim, resources etc.)?
 Financial manager needs to think about the investments that are needed to meet the firm’s long-term goals & financing that
must be arranged.
 Long-term financial planning focuses on alternative strategies that allow managers to avoid surprises & consider how they
should react to surprises that can’t be avoided. It helps to establish firm’s goals & to set standards for measuring
performance.
 Short term financial planning ensures that the firm has enough cash to pay its bills and makes sensible short term borrowing
and lending decisions. Options for Short-Term Financing are Bank loan & Stretching payables.
24) Write down, cycle of operation. How can we calculate cash cycle?

Cash Cycle = Average days in inventory + Average collection period - Average payment period
 Average days in inventory = Inventory at start of year / Daily cost of goods sold
 Average collection period = Receivables at start of the year / Average daily sales
 Average payment period = Payable at start of the year / Daily cost of goods sold
25) What does it mean cash budget, inflows and outflows part?
 Cash Budgeting: It’s to forecast future sources and uses of cash. These forecasts used for two purposes:
o Provide a budget against which following performance can be judged.
o Alert the manager to future cash-flow needs as cash has a habit of disappearing fast.
 Inflows: sales become accounts receivable before becoming cash.
 Outflows: There are always many uses for cash than sources. We have divided the uses into five categories:
o Payments on accounts payable.
o Increase in inventories.
o Labor, administrative, and other expenses.
o Capital expenditures.
o Taxes, interest, and dividend payments.