Answer each question succinctly yet completely. Be mindful of the multiple parts to each question.
1. Discuss the significance of the numerator and denominator in the corporate value proposition. Who benefits from the maximization of corporate valuation? (Note: Milton Friedman, among other notable financial economists, had definitive opinions on this.) Why theoretically do so many entities benefit? Do you agree that they all benefit?
2. Management consultants (McKinsey, Accenture, etc.) are generally hired to increase the intrinsic value of the firm. List the critical two elements-with direction-of the value maximization template on which a consultant may focus to accomplish this task, outlining in turn two generalized examples of potential actionable recommendations for each of the elements.
3. Compare and contrast mutual funds and hedge funds (clients, risk, minimum investment, etc.). Give an example of a provider of each fund. Why might you not presently be a hedge fund client?
4. With respect to a balance sheet with categories Assets, Liabilities, and Equity, construct a simple mathematical equation that links the three. How is the Income Statement different from the Statement of Cash Flows? How does accrual accounting partially explain this? Which one is the most important to discerning the company's true operating story and then forecasting its future prospects?
5. Link the definitions of NOPAT and FCF. Invoking extreme simplicity, how would you describe NOPAT to a colleague? How would you map FCF with respect to NOPAT, net fixed asset investment, and net working capital?
6. NOPAT and FCF are likely of limited use in a vacuum (i.e., one year). Accordingly, explain why ROIC, MVA, and EVA-and the historical trends thereof-are important performance metrics in a financial analysis exercise.
7. Explain the key component ratios in a three-phase DuPont formula. What potential insight could a five-year historical DuPont analysis provide? How-and why-is a historical review of the DuPont components linked to the concept of trend analysis?
8. Discuss in a sentence the relevance of historic, industry, competitive, and market benchmarking with respect to financial ratios (i.e., advantages and challenges for each of the four). What, if anything, is revealed in the analysis? What makes benchmarking difficult?
9. Why is discounting used when describing PV and compounding used when depicting FV? What is the difference between simple and continuous compounding?
10. What purpose does determining a PV or a FV or a PVA or a FVA serve? In essence, what am I trying to accomplish by discounting everything back to a PV or PVA? What am I trying to accomplish by compounding everything forward to a FV or FVA? Give an example of how you may someday use these concepts to make a decision.
11. What causes a bond to trade at a discount from its issuance price? What causes a bond to trade at a premium to its issuance price? Would a AAA bond issued in 2006 with a 9% coupon and a 30-year maturity likely be trading at a discount or premium today? Why? At what price do bonds purchased at premiums and bonds purchased at discounts each trade at maturity?
12. Explain the elements of total return with respect to a discount bond. Explain the elements of total return with respect to a premium bond. In the latter, why would one be willing to pay a premium over the par value that she will receive at maturity?
13. What is a normal yield curve? What is an inverted yield curve? What is the yield curve specifically designed to represent? (Hint: Think government, mortgage, AAA, and municipal bonds.) What does the inverted US Treasury Bond yield curve generally suggest about the upcoming economic environment?
14. Describe the use of scenario analysis in the expected return generation exercise. What is the goal of scenario analysis? State the one word that academics generally use to describe the concept of risk. What metric(s), sometimes referred to as a second moment, is used by econometricians to describe this risk?
15. What function does the CAPM fulfill? What is the role of Beta? Explain the role that Beta plays in determining the return on a stock? If the market is up 10 percent and the Beta of the stock is 2, what is suggested regarding the expected return on that stock? What if the market is down 10 percent; what then is the expected return on that stock?