Finance 325 Midterm: Navigating the Key Concepts

The Finance 325 midterm, regardless of the specific topics covered, invariably tests your comprehension of fundamental financial principles. Expect a blend of conceptual understanding and practical application, often manifested through problem-solving scenarios.

A crucial area will likely involve the time value of money (TVM). This encompasses present value, future value, annuities, and perpetuities. Mastering these concepts is paramount. Expect calculations requiring you to discount future cash flows to their present-day equivalent, or to project investments into the future. Pay close attention to the frequency of compounding, as this significantly impacts the final result. Practicing various TVM problems with different compounding periods (annually, semi-annually, monthly) is highly recommended.

Bond valuation is another potential focus. Be prepared to calculate the price of a bond given its coupon rate, yield to maturity, and time to maturity. Understand the inverse relationship between interest rates and bond prices. Know how to determine current yield and yield to call. Differentiate between discount bonds, premium bonds, and bonds trading at par.

Stock valuation methodologies are almost certain to appear. Familiarize yourself with the dividend discount model (DDM), both its constant growth and non-constant growth versions. Understand the limitations of the DDM and consider other valuation techniques, such as relative valuation (price-to-earnings ratio, price-to-book ratio) and discounted cash flow (DCF) analysis. Be able to estimate a company’s intrinsic value based on its future cash flows and a determined discount rate (often calculated using the Capital Asset Pricing Model – CAPM).

Risk and return are inseparable concepts in finance. Understand the different types of risk (systematic vs. unsystematic) and how they are measured (beta, standard deviation). The CAPM is a cornerstone model for determining the required rate of return on an investment. Be able to calculate the required rate of return given the risk-free rate, market risk premium, and beta. Understand portfolio diversification and how it reduces unsystematic risk.

Finally, exam success hinges on diligent practice. Review assigned readings, rework examples presented in class, and complete all assigned homework problems. Form study groups to discuss challenging concepts and work through practice problems collaboratively. Time management is crucial during the exam. Allocate your time wisely based on the point value of each question. If you are struggling with a particular question, move on and return to it later if time permits. Understand the formulas you are using, rather than simply memorizing them. This will allow you to adapt to different problem scenarios. Good luck!