Finance 301 Exam 3

Finance 301, Exam 3 typically focuses on core concepts related to corporate finance, investment analysis, and possibly some aspects of international finance depending on the specific curriculum. Expect the exam to be heavily problem-solving oriented, requiring application of formulas and principles learned throughout the semester.

A major area of emphasis is likely to be capital budgeting. This section tests your ability to evaluate potential investment projects using various methods. You’ll need to be proficient in calculating Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index. Practice applying these methods to scenarios involving differing cash flows, discount rates (weighted average cost of capital – WACC), and project lifespans. Understand the decision rules associated with each method and their limitations. For instance, know when NPV is preferred over IRR and why.

Another crucial topic is cost of capital. Be prepared to calculate the cost of debt, cost of equity (using methods like the Capital Asset Pricing Model (CAPM) or the dividend discount model), and the overall WACC. Understanding how different sources of financing impact the overall cost of capital is essential. Exam questions may require you to adjust for flotation costs or tax implications when calculating the cost of debt.

Working capital management is also frequently covered. This includes topics such as inventory management, accounts receivable management, and accounts payable management. Expect questions related to calculating optimal inventory levels using the Economic Order Quantity (EOQ) model or analyzing the costs and benefits of different credit policies. Understanding cash conversion cycles and their impact on a firm’s liquidity is also important.

Depending on the professor’s focus, the exam might include questions on dividend policy and capital structure. For dividend policy, be familiar with different dividend payout methods (e.g., constant payout ratio, stable dollar dividends) and the factors that influence a company’s dividend decisions. For capital structure, understand the trade-off theory and the pecking order theory, and be able to analyze how changes in debt-to-equity ratios affect a firm’s risk and value. Calculations involving leverage and its impact on earnings per share (EPS) are also possible.

Finally, remember to thoroughly review all assigned readings, lecture notes, and practice problems. Pay close attention to any specific formulas or models emphasized by your professor. Effective time management during the exam is crucial. Allocate your time wisely based on the point value of each question and don’t spend too long on any single problem. Show your work clearly, even if you’re unsure of the final answer, as partial credit may be awarded. Good luck!