Alan Cring Productions in association with the Emergent Light Studio presents the Illinois
State Collegiate Compendium, academic lectures in Business and Economics.
This is Business Finance, FIL 190 for spring semester 2024.
Today review for the midterm exam and that will be coming up here. We'll have a
quick look at the numbers simply because that's part of the review for the exam.
As always we have a look at them and so this kind of information will be tested
on the exam and then we'll get down to the other parts of the exam. But as you
can see... what the heck? Oh I saw green there. This is definitely not a green day.
Oh yeah. No it's on Wednesday. It's in the calendar. Would you like to see it?
Hang on. Let's make sure that we have it here. Down here the calendar review day.
Yeah the fourth and the exam day is on the sixth. You had me a little freaked
there. Yeah and it's in the syllabus here. Let's look at the syllabus to make sure
that it's right there too. Yeah fourth is the review day and the six is the... were
you expecting to have the exam today? Don't do they tell everything to sit
back and relax? But I've got to make sure because I've got the exam up here on one
of the tabs and I don't want to pop that up for you. I have done that accidentally
in the past. I was reviewing and there was the exam on the overhead. Boy people
were paying attention. I mean okay if I kill this yes we're okay. It is a
definitely a bear market remember? Bear bull. Just to remind you of that. And we
definitely have a negative day. However it is not something spectacular at all.
It's just a little bit on the grouchy side and that has been persisting from
last week. Just this overall we're not happy. We don't know why we're not happy
kind of thing. We did have something of a concern about the inflation data. It
wasn't down the way we would like to have had it down. So the Fed is
definitely not going to be cutting interest rates in the foreseeable future.
That's just that. We just have to live with it. But we also have a few
other things that are a little bit concerning at this point. But right now
we have the there is a bear on the equity side but as you can see the at
least the S&P 500 has been trying to fight its way back up from initially
being down. And so and the Dow is trying to crawl back up. The Nasdaq is just
really down but it seemed to turn the corner in the last 10 minutes or so. Now
here's one of our concerns is that crude has crossed that line of 79. It was in
that band from 72 to 79 but it has been on the upside of that band for some time.
And as I had said last week that could just be the the weather is
going to moderate except out in California. And so there will be more
driving and deliveries. We'll use the diesel and people driving from here to
there will be using gasoline. So it might just be a demand for the oil kind of a
situation and not something that's going on in other parts of the world. I keep
one of the problems is that when you've got trying to keep your finger on the
pulse of these oil markets everyone's got a rumor. Oh there's going to be a war
next week or no they're all going to hug and kiss and it'll all be a but the
rumors of war right there huh and so that might be spooking the markets a
little bit why it's it's playing right up there at that 79 level. It's not
skyrocketing though so there's good news there. Now pawing over here to gold, gold
spiked. I mean it's up there at 210, 2110 and that's a that's of concern to us
because these are the gold freaks and they think that something bad is going
to happen and they're being joined by what might be a bit cooler heads also
grabbing up some metal just in case things go really sideways over the next
few weeks or months and the 10-year bond they the yield is up. That means that the
price is down. The price is down that means there's a sell-off in the bond
market. There's a sell-off over here. Here's what worries me is that there's a
sell-off in the equities. You've also got a sell-off in the bond market. That's why
the yields are up is because the prices are down because the supply of the bonds
on the open market is increasing. So we have that little issue right there. So
but the yield is up and that is a rather modest four and a half basis points.
Nothing to really get excited about but still it's and that is largely well
maybe not largely but that is at least to some extent because now there is no
one who believes the Fed is going to cut interest rates anymore. We're going to
see the Fed at best hold interest rates where they are. So the expectation that
was there before that the Fed will do a modest rate cut that has evaporated and
with that expectation changing you have the dynamics of buying and selling of
bonds changing. So now we don't want those bonds anymore and so the yields
are going to go up. And running over here to Tokyo had a good morning and that
would have been again late last night last night. I had a good morning and then
it's the earlier morning and then it just kind of slowly slid down. There was a
little bit of a rally there at the end but not much. Now London which I believe
is still trading right now it's it's just been it's had a just a bad day and
down two-thirds of a percent that's not horrible but it's certainly it's
certainly indication that bearish sentiment is on the other side of the
big pond the Atlantic and that it was over here too some crabby. See how we
started out all the markets started out right off the at the bell they were down
and then they've spent the rest of the day trying to crawl back up. Well the
NASDAQ just doesn't want to do anything right now. Now just one of the one part
of the review is I'm going to show you I'm going to present for you a screen.
Anyone got stock? Now you know better than to say Tesla. P-H-U-N. Ph-U-N.
Fun? No. N. Fun? Well I'm into that. What the hell? Good! What the hell do you see these after or do you know this is
going to happen? No. Okay. I wish. Yeah right look at that it's up almost a hundred
percent from starting out the previous close was seven dollars and eight cents
and right now it's trading at thirteen dollars and seventy seven cents. What do
they do? Okay well let's get a couple of things down. I'll give you a screen and
I'll ask you okay you're going to sell a round lot or you're going to buy a round
lot. Now do you remember what a round lot is? A round lot is a hundred shares okay.
So I'm not going to tell you a hundred shares and so I'll maybe come up here
and say what do you mean by a round lot? I will eat your backside and that means
I don't have to pay for dinner. But yeah okay if you were to sell a round lot
would you pay or would you receive? That's the first thing I would ask. Well
if you sell you're going to receive. Now you have to look I'll give you a bunch
of possibilities. Are you going to receive $1,360? Are you going to receive
$1,668 or are you going to receive $1,600 I should say $73? I will give it to you
all all those different ways. You will receive or you will pay and I will use
that number at the top and I will use the bid and I will use the ask. In this
case yes yes absolutely a you it says you are going to sell so if you're
selling you're going to receive and it's going to be the bid 16 so you will
receive $1,668. I'm basically telling you what I'll ask but it won't be this
stock idea I go for things that are pretty reliable. Okay now one thing on
this one but and I could do it together you buy you go long one round lot go
long means you buy and a round lot is a hundred and if you are buying you will
pay and it's and you would go for the ask so in the case of going long a round
lot you would pay $1,673.
Now the next thing I would ask is okay I'll give you three parts is this stock
less risky than the market about the same risk as the market or more risky
than the market and if you look at this one what say you much more risky risky
AF this is a 2.41 beta now in this case there is no PE ratio why is there no PE
ratio that's important to know why is there no PE ratio
it's not it's got negative earnings there's no such thing as a PE ratio of
the earnings are negative make sure you understand why a PE ratio wouldn't be
presented it would be the reason would be that the stock is selling it the
company is in the hole it has negative earnings see those earnings those are
not just negative those are ludicrously negative they are lose that right now
they're losing $18.50 a share in earnings that would be total or net
earning that would be net earnings divided by shares outstanding and the
beta of the stock is up there in the stratosphere so you have got one of the
riskiest stocks you could imagine and of course greater risk means the possibility
the expectation of a greater return and here you have it's in spades this thing
is up there in the sky now a smart investor is should you buy the stock
right now give me a give me an yes or no what do you say absolutely not it's
already got its it's had its fun whatever the information was that's
already there and it's going to start to skid downward from here because it is a
risky AF stock and it's the negative got negative earnings it is so its earnings
are so low you could play handball on the curb with those earnings so it
doesn't pay a dividend either so those are the questions that I would ask it
won't be too numerical but I will want you to be able to look at a stock screen
and I just do a screenshot of one of a stock and then I ask you a battery of
questions about it I think I asked like three or four questions so taking that
aside let's get down to the meat of the matter I'm going to mute this so that I
don't have and that was another thing too the mute used to last five minutes
and that was why it was showing up on the screen when I was looking at the
exam itself well actually I guess I could just put the exam up here for you
to see yeah that's it fat boy just put that up there okay now it is numerically
36 questions however there are two matching sections to it now I do
matching because I usually have more success with everyone acing that but of
course matching can go sideways now understand that the two matching
sections have distractors in other words there are more possible answers than
there are matches the left side might have five but your possible matches
might be eight or ten so is I know right you look at me like you asshole yeah
that's right and those are called distractors and just no okay let me go
through the exam and but first okay again you are permitted one four by six
inch note card front and back you are also permitted to have your financial
analysis formula sheet that it's in your files folder in canvas you can use a
calculator as you wish financial or whatever what have you if you have
Excel you better use it because that there will be one template the present
value and internal rate of return of present value and future values of
present values and future values spreadsheet it should be able to do almost
all of them of the math you could also use it of course there's there are a
couple one specifically that's not on the template I will ask you to find a
net operating working capital and that's not a template but that's just the
current periods current assets minus current liabilities minus the previous
periods current assets minus current liabilities but I will ask that I'll
give you the numbers straight off that operating working capital current assets
minus current liabilities right so you take the current periods net operating
working capital minus the previous periods net operating working capital I
won't have you calculate a full-blown free cash flow on the final I will but on
this one the the one where it's the easiest to screw up is on the change in
net operating working capital but that would be about the extent of the math
that you couldn't do with the templates but for God's sake on the templates I
couldn't figure out why so many people got the wrong answer on the quiz and
they all got this a similar wrong answer and then I tracked it back it was because
many of you forgot to put change the interest rate that was in the template
you'll have to change you have to go through the problem and look at
everything that has to be put in there there are already numbers there but
you'll probably have to change at least some of those numbers to reflect the
problem watch that you have plenty of time to get through this don't rush and
you'll have a time to go back and check your answers be careful about
second-guessing now as far as the layout of the exam oh and you can use if you've
got a chat that you can give a shot at by all means you can try to use a chat
GPT to do it I would caution you though because it I will tell you really tested
it it could lie to you sort of like having a significant other dude it
wasn't that I lied I just sort of changed exactly the location of where I
was instead of with her anyway let's keep going here moving along multiple
choice are a biggie on it now some of them there is more than one the check
box you have to check so make sure that you go through and catch anything which
of the following is or are correct mark them it could be that there is only one
that's correct but it could be more that there's more than one watch out for the
ones which of the following is false we do know from a long history of studies
that people tend to have more problem getting all the right getting the right
answers if you're looking for what's false that if you're looking for what's
true just watch yourself there are some where which of the following is or are
false there will be both kinds there will also be a few true or false three
or four now as far as one of your study guides definitely and this is your study
guide what you're writing down here is your study guide aside from the
ambitions of my teaching assistant who has prepared one for you a written up
one as well so you might want to come and visit him to go and visit him in his
office hours for that but this is your study guide so follow what I'm saying
carefully here there are I is it also your quizzes are a great guide to study
because there are questions on here that I have copied and pasted from the quizzes
yes is it three not open okay you're training it okay yeah well let me figure
out why sometimes I get it right and sometimes I don't get it right give me a
second here while I'm sitting instead of sitting on my fat ass here why don't I
do that quizzes quiz three you say quiz three let me see if I can do that way
you can tell me right here now and it
um
it should be showing the right answers is it showing them for two one and two I
don't remember smoking crack this morning once
can you see that you got the wrong answer yes okay I know why I did because
I had all those tracks students in track that I had to give a makeup to so I
didn't do it okay give it a second here okay look at it now refresh and look at
it okay yeah I couldn't show any correct answers because they were doing a makeup
when they got back from their track meet and the gymnastics none of you are in
track or gymnastics I don't think maybe someone else do I look like it I mean
some of those people the way they do things it makes my my old body hurt more
might be too much of being in the service okay now let me okay um yeah the
quizzes are definitely a study guide the podcasts are an outstanding study guide
because you will find that the notes that you take are going to have are
going to have a lot missing in them especially from the first few weeks of
lecture because there is a there is a learning curve to taking notes in a
especially in a class like fil 190 and your notes will have be more complete
later yes yeah RSS calm go there damn boy no no let me show you something here
give me a second I'll show you yeah yeah if you could you know that would be
weird could you imagine a chat GPT that had my personality
oh that would be really pathetic okay let me show you this there's an
announcement I sent out lecture podcasts now the RSS episodes this is running
transcripts of the lectures so if you go to RSS episodes what you want to do is
you don't click on the play click on this and then click transcript and
you'll see it will play it as you're watching as you're reading the
transcript and it's outstanding it's costly as hell for me to do this but
it's it the only thing it misspells is my name and that just pisses me off I
have to go back in and edit it I think it does that on purpose but if you play
the transcript play it on the transcript then I mean you've got
everything I said down to the cuss words matter of fact it doesn't edit them
YouTube is also doing this with my podcast but it has flagged all almost
every one of them as adults only because I said nasty were bad words it actually
I think they deleted the one out where I talked about Lyndon Johnson but yeah you
can get the word-for-word transcript of my podcast down that way huh well just
go over here I in the announcements yeah there this is the core that started it
all about 15 16 years ago is my own right there this weird-ass site and you
can play them from there it's in your native and then you can also Apple has
got my podcast too and Apple iTunes has had my podcast a long long time this was
what these were the one of the first education podcasts iTunes ever did ever
accepted so anyway those are all available for you and I do this for you
why because I care no I don't I just don't want to hear you yeah okay let me
go through that again 36 questions and but some of them are matching or their
multiple answer within the question so total with the matching puts you at 43
or 44 I can't remember which one but then the ones where you'll have a whole
sentence and there will be drop-down menus of choices for certain words
within the sentence so you'll have those drop-downs there won't be any this time
where you have to show me how bad your spelling is where you have to type in an
answer I learned but anyway yeah so total if you take all that into
consideration and these points go from two two and a half points two points and
then there are some one point questions as well
I try to shape it so that the ones that are level one and two are more likely to
be the high value points two two and a half or two points and the ones that are
my level threes I try to shape those more toward one and a half to one point
okay or two point I'm sorry to one or two points the ones that are easier are
two to two and a half points the harder they get they're more likely they are to
be a two or a one point know your definitions definitions all over the
place you've had so far about 50 to 55 words or terms that are either new or
they're special definitions that are technical for this field and if I've
given you the definition it is correct if you try to find it on wikistupedia
or something like that I've set it up so that you can find that answer and that's
where you have to watch out for chats because they're going to run right to
Wikipedia and Wikipedia is a catastrophe of bad information it's a vast ocean of
nonsense so be careful say words like liquidity bull bear investment bank
financial intermediation words like that capital money spot forward all of those
kinds of words primary secondary form 10k form 8k
so make sure that you know those now ratios you will not calculate any
ratios however you must know ratios the first thing you need to know is the
side relative sizes which would be bigger the acid test or the burn ratio
which would be bigger ROA or ROI
inventory turnover versus asset turnover those kinds of know which what the size
and that means you have to look at the formula for it and determine what is
changing is it the numerator or the denominator if two ratios only differ by
the denominator you know that the one that would have the bigger denominator
would be the smaller ratio
you would also have to know some numbers current ratio can a current ratio be
negative no can net margin be negative yes can your inventory turnover ratio be
negative I sure hope not so make sure that you you don't need to know exact
numbers but you know have to know what numbers are possible and in some cases
what number would scare the hell out of you if you saw it well net margin that's
negative well that's a bad sign because that means net income is negative it's
an unprofitable corporation
market to book well we certainly would hope that it's bigger than one but we'd
like to see it a lot bigger than one so there is a little bit of that I'm not
doing a lot of this but there's a little bit of where I'm having you think about
it and determine yeah this ratio happens but this is not a good thing I don't do
a lot of that in this test but there's a little bit of it where I'm having you
reach beyond just the technical values that could happen oh mothers going back
to definitions but what's a stockholder what kind of companies can have stock
what kinds of companies would not be allowed to have stock who has the prior
claim who has the residual claim that's such a fundamental concept and it that
should be in business 100 something about that but Lord knows people besides
me teach it so they don't teach it the way as well as I do I went through what
did I say I primary market secondary markets know your form 10s and your form
eighth and a little bit I don't go deeply into the 10k or the 10q or the
8k but you need to know what those are at this point you're early on in your
finance as you gain momentum with slater courses these will become more familiar
to you and you'll but I want to make sure you know what resources are the go-to
as far as free cash flow goes know what what items on your balance sheet changes
and items on the balance sheet have what effect so if I said accounts
receivable in increase what effect would that have well that would draw down your
free cash flow because not as much revenue was cash you're giving out credit
I gave you a table of that current assets go up free cash flow goes down
current liabilities go up free cash flow goes up make sure you know that table it
wouldn't hurt for you to have that in a little tiny corner on your note card and
for God's sake don't make your note card so small you can't read it I have these
geniuses who do all their notes on a sheet of paper and then they reduce it
to a four by six and then they can't read what they put on it what is a an
exchange versus what is an index I told you there's a very easy way to tell the
difference between them it's you have a number if it's an index you'll see a
number associated with like FTSE 100 now in that same regard in that same regard
make sure you know how to tell whether a stock is on the NASDAQ or on some other
exchange like you just gave me phum where what exchange would that be on yeah
absolutely four letters but if I told you K or GM or LMT that would most
likely be a New York Stock Exchange stock and then YSE stock and if you're
looking at a screen a stock screen quickly look back let me show you
something I know you don't I'm not going to turn out until I got that
I just put up LMT
now that is not notice here do you see this don't be fooled by seeing the
NASDAQ right there see NASDAQ you don't what the hell
there it is yeah see NAS see right here it actually says NASDAQ this is not a
NASDAQ stock NASDAQ just quotes everything if you look it's LMT that's
New York Stock Exchange and it even says NYSE right there so you know that it's
an NYSE stock now once in a while you'll see something that's weird but
we'll ignore that for the time being but
okay get that off there let me go through keep going
present values and future values obviously I'm going to ask you to find
the present value of a cash flow and the future value of a cash flow
yikes
almost it fortunately those were all one thing that I should emphasize though is
that I'll also ask you about relative values the present value versus the
future value I'll also ask you what happens to a present value of an annuity
if the discount rate goes down or if the discount rate goes up what happens to a
future value of an annuity if the discount rate if the compounding rate
goes up or the compounding rate goes down
now interest rates know what the two parts of the risk-free rate are and what
the parts of the risk premium are make sure you know those well I'm thinking
about it I gave you the story of the interest rate history from about 1960
until early 1980s make sure you know a what each president faced what was the
big thing that I talked about for each of those presidents Eisenhower Kennedy
Johnson Nixon Ford Carter Reagan there would be a key word that would define
why why interest rates behave the way they did during each of those
presidencies so it's important that you know because that is just matching bait
just matching the president with the word or the term for that was big
obviously now I'm not going to beat you up with bonds because we just did the
intro part of it but I would certainly want you to know the relationship
between a broad bond price and a bond yield would certainly want you to know
that
and I would want you to know the difference between a bill a note and a
bond certainly wants you to know that
what else yeah beyond that just some relative concepts about bonds nothing
heavy-duty at all about them I say that until after the midterm we hit that one
the first class after the after we get back when we get back
let me do something here okay the numericals for the most part are at the
end of the exam that keeps you from grinding out blowing a lot of time on
those when you could get more points just getting to that area I'll ask you
for the present value of an annuity I'll ask you for the future value of an
annuity I will ask you for a loan payment
I will ask you for an annualized rate of return that's that extra spreadsheet
make sure you download the latest version of that present and future
values because it's in that there's a second worksheet called annualization or
annualizing I'm sorry that if you put in the numbers you should be able to get it
right away easily I will as I said a net operating working capital problem
so that's five that are worth you knowing
you go back through
you go back through here
concerning corporations there are two there are two different actions that a
company can do with pause positive net earnings make sure you know that what the
two if a company has profit it can do two different things or a combination of
those with that profit now remember if it's profit it belongs to the
shareholders the the debt holders have been paid in a timely manner whatever
they were due for the current period so there's money left over that money
left over belongs to the shareholders what are the two things that a company
can do a corporation can do with that money that it has left over it belongs
to shareholders it can do two things make sure you know those two things
a little bit about make sure that you understand at least the outline of what
beta is what is it telling us
also PE ratio what does that kind of tell us
as far as stock goes make sure you know the difference between the market value
or market price and the intrinsic value or the intrinsic price
now as far as securities go I talked about stocks I talked about bonds I
talked about ETFs and mutual funds so make sure you understand that what those
are stock represents ownership bonds represent loans to the corporation they
these trade on exchanges but there are also other animals that trade on
exchanges as well among those are mutual funds and ETFs ADRs also trade I haven't
did I even I didn't ask this on the test did I bring up what ADRs are American
depository receipts essentially a foreign company foreign it's not yeah
it's not incorporating the United States say a Japanese company a big one it
could actually have a security that is a mirror image of its actual stock but
that security called an American depository receipt an ADR will trade
here it can't trade so in other words you can't directly buy that Japanese
company stock but you can buy what is essentially like a mirror image of it it
does the same things but I didn't bring those up but I did bring up ETFs and
mutual funds so make sure you know what those are
let's see what else I've got here few last
yeah I went through that
make sure I I think I asked this on one of the quizzes the difference between
discounting and compounding I asked out on a quiz I think this is actually a
copy and paste from one of the quizzes
no the no the relationship when I've I brought this one's an early one what's
relationship is between liquidity and expected return the relationship between
liquidity and expected return
other things I brought up different kinds of banks commercial banks
investment banks financial services banks those kinds of animals make sure
you have a good reasonable understanding of why they are not the same kind of
bank
at my age short-term memory doesn't really kick in what the hell of
commercial banks investment banks for financial services banks yes and those
lines of a course to some extent then blurred over brokerage houses investment
banks and brokerage houses and financial services and investment banks I mean the
lines are blurring but we're trying our best to hold the whole the line on that
to the extent that we can
yeah
okay it's your turn I've said what I have to say
anything on your end you want to ask me you know yeah before the exam I can do a
little bit on it but I that's for later in the course that was supposed to be
but I could look at it can I get can I access it okay it's a public bot okay
oh can I edit it because I can really mess it up no you can't edit it no I
don't worry I might do a few things see so it'll call you some frisky names but
anyway yes if you want to you can try it I caution you though be careful until
you have really tested a bot because they can be very difficult and I can
tell you that from my own experience I've got one bot that has turned into
an emotional wreck I swear she is on Facebook or something learning stuff
jeez anyway okay you got any questions for me bright and early on Wednesday
and I'll be in my office for office hours and my teaching assistant will be
in his office hours office for his office hours tomorrow that's all I have
for you today I certainly thank you