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 240 for spring semester 2024.
Today, review for the midterm exam.
As part of the review, I will go through a look at the numbers, as we always do at the beginning of class.
This is pursuant to the midterm exam because one of the sections of the midterm exam is for you to look at a screen.
I'll have a screen capture of a stock, a common stock, and you will answer some questions about it.
This is part of the review and I'll key it to that.
But before we do that, just an overall look at the numbers to make sure that you are on key with that.
There will be a few issues in this review right here that will serve you well for the exam.
As you can see, this is a bare day, but it is certainly not anything majorly catastrophic.
It's just a little bit of a down day with not a major bare day, but it is a bare day.
You can see that the markets are down, not much, but there is a consistency across the board.
So make sure you know what I mean by a bare day, by a bull day, and all of that.
And also, as we're looking at the S&P 500, the Dow 30, the NASDAQ.
Well, those would tell you that we have two indices here.
The ones with numbers are indexes, and then the one that doesn't have a number is an exchange.
And of course, the Russell 2000, that would be an index of 2000 stocks.
So going over here, you can see that gold has really taken a jump.
And so apparently, the gold bugs are in the mood to put money into the possibility that the world is coming to an end.
We'll see how that plays out.
But over here in the bond market, 10-year bond, it has been up all day.
And you can see that it is up 4.5 basis points.
It spiked up, and as you can see, though, after that, it just stayed there.
So in other words, there was a surge of demand for bonds.
Well, I shouldn't say that.
There was a surge of supply.
The markets, there was a dump of bonds, because the yields are up.
That means prices are down.
So that tells you, okay, something has spooked the bondholders, and they've sold bonds, dropped the price.
That means that the yield has gone up as a result.
One of your questions on the exam will be to follow that chain of logic, three drop-downs.
The bond market, I'll say the yields went down or yields went up, and then you'll say this means that demand or supply rose,
means a price rose or fell, or something like that, which means a supplier demand did something, which means that yields did something.
We'll see if you can follow that through.
I'll talk about that a little more later.
But this is a classic kind of three-step question, drop-down menu, so you don't have to try to spell words in the fill-in-the-blanks.
It's just drop-downs.
So that will help you with that.
Okay, we see that London dropped through the day, and I think they're finished up now.
But then once it had finished being unhappy about information, no more information came through, and it just drifted for the rest of the trading day.
Tokyo, on the other hand, had some good news that pushed the market up when the market opened last night.
But then it just kind of slid back down slowly through the day and finished up just a half a percent.
Okay, now let me take you through.
I'm going to pull up a stock here.
I will do a screen capture, and I'll pull up Lockheed Martin for lack of any better inspiration.
Lockheed Martin.
Now the first thing that you'll have a screen, it'll just be a capture.
Really?
There we go.
It'll just be a screen capture and a couple of things to give you a good flag on it.
Lockheed Martin is LM&T.
That's three letters, and you can see right now it is a New York Stock Exchange stock.
I'll ask you, what market does this trade on?
Remember that four letters would say that it is a NASDAQ stock.
Three, two, or one, most likely an NYSE stock.
A little mention here.
Don't be bluffed.
You see that NASDAQ is actually there.
Don't let that fool you.
NASDAQ is just the quotation service for everything.
You look at the number of letters, and you look at the first thing that's showing there, and that's the NYSE.
Taco Bell last night was not doing so well.
Okay.
Now we're good.
Okay.
So now, first things first.
I will say, okay, you went long a round lot of LM&T.
That means that you bought 100 shares.
And I would say, okay, which of the following happened?
Now I will say, okay, you received $43,250.
You paid $43,250, or you received $43,199, or you paid $43,199, or your next choice would be you paid $43,221, or you received.
$43,221.
In other words, I'll give you six choices.
First of all, you went long.
That means that you bought.
So you're paid.
Now if you're buying, that means that you will pay the ask.
If you can remember all that, you've got a nice little series of three or four questions.
One of them.
If I say you go long a round lot, that means that you bought 100 shares.
If I say you sold a round lot, that means that you sold 100 shares.
A round lot is 100 shares, and I say a round lot in the problem.
And if you're buying, you're paying.
If you're selling, you are receiving the money.
And if you're buying, you'll pay the ask.
If you're selling, you'll receive the bid.
Okay, that's one of them.
Now another of the questions I'll say, okay, the risk of the stock.
This I'll say it will come in the form of this stock is riskier than the market.
This stock has about the same risk as the market.
Or this stock is less risky than the market.
So that depends upon the beta.
In this case, your answer would be this stock is less risky than the market.
And then I'll ask you, based on the price earnings ratio,
this stock is overvalued relative to the intrinsic value.
This stock is about at the intrinsic value, or this stock is undervalued relative to the intrinsic value.
There'll just be a drop down.
You choose which one is at correct.
And in this case, you'd say this stock is less risky.
I'm sorry.
This stock is undervalued relative to intrinsic value because it's below one.
And that will be the screen.
It'll be a part of the exam.
It'll be a screen capture, a nice graphic, and then the questions that I gave you.
And all I'm asking you to do is show me that you know how to read these screens.
Looking down here for, yeah, okay.
And it won't be a complicated one.
It'll be straightforward.
It won't be anything, any rocket science, scientists.
But that's some fairly easy points if you know how to read the screens.
Let's see now.
Okay.
Let me get out of this for a little while here, and we're going to talk about the exam.
But that was starting it out.
Okay, now, as far as the exam is concerned, the number of questions is 36.
However, there are some that are multiple part.
You have two matching sections.
So one of them is like five matches, and the other is four matches.
So that takes you up to 44, 45 questions, I guess.
And then some of the questions, there are multiple parts to the answer.
You'll have a series of drop-downs for the different answers.
So you won't have to spell any words, so I don't have to correct any for misspellings that I didn't see.
So overall, you would say that there are about 52 to 54 questions or parts of questions.
Now, the questions vary in points from two and a half points down to one point.
Two to two and a half would be somewhat of the relatively medium to somewhat easier.
The one to two pointers would be more of the more difficult ones, or something that's just a gimme question kind of thing.
I try to balance the loads so that those numerical ones, for example, they're two-point questions each.
They're not the two and a half ones, because that can accumulate rather quickly if you're not good at the math.
Okay, now, you are allowed a four-by-six note card front and back for the exam.
You are also allowed that financial ratios formula sheet to have with you for the exam.
You can use a financial calculator like TI-83, physical or virtual calculator.
And you can use, you should use Excel and the template that I provided for you,
the present and future values template that will save your bacon.
If you can use that, you know how to use it properly.
Get the numbers that I give you into the template.
You should not have a major difficulty with the numerical, most of the numerical part of the exam.
Now, as far as the numerical part goes, there will be the present value,
and now you will find the present value of an annuity.
You will find the future value of an annuity.
You will find a loan payment.
You will also find an annualized return.
Remember, that's the second worksheet in that spreadsheet template.
And you will find one where I'll ask you to calculate a change in net operating working capital.
That should be enough.
As far as other quantitative, mathy kinds of questions,
I'm not foreseeing much in the way of calculations, but there will be some numbers.
As far as ratios go, you will not calculate any ratios.
But you will have questions where I will ask about ratios.
Which ratio is bigger?
The acid test or the burn ratio.
Which ratio is bigger?
The inventory turnover ratio or the total asset turnover ratio?
Along that line, so that you need to know and understand how the formulas are working.
If two formulas are related, but their denominators are different,
you see which one has the bigger denominator.
That one would be the one that's smaller of the two ratios.
That's a classic kind of question.
I would also ask you something maybe along the lines of what ratio, what could a ratio not be?
Well, could you have a net margin less than zero?
Well, yeah, if the company's got negative profit, sure, net margin could be less than zero.
But does it have to be larger than a specific number?
No, the net margin can go from negative infinity to infinity, in fact.
But other ones, well, times interest earned.
You certainly don't ever want to see that below one.
If you see it below one, that would be a very bad thing.
But other than that, it will be something along the lines comparing two ratios,
which one will be larger than another.
Or what numbers could you not see?
Or what numbers would be of concern to you if you saw those numbers?
Questions like that.
Not calculations, but knowing what the calculations, the result was telling you about the ratio
or the company that is being represented in the ratios.
So that is kind of numerical, but it's much more of using your judgment,
using your knowledge of the ratios to answer those kinds of questions.
Okay, going on.
Terms and definitions, they are just the meat of a classic FIL 240 exam.
Knowing what a term means, knowing what the possible different, within a category like banking.
You need to know what some types of banks can do, what they can't do.
That would mean that you need to know what investment banks are, commercial banks,
financial services companies, you need to know what they do.
What can they do, what can they not do?
Obviously terms like liquidity.
I will be looking for, I will give you the option of choosing an answer that you get off the internet,
which would be wrong.
Make sure that you get the definitions that I gave you for these.
It's always important that you know the difference between what the internet can do for you
and what you have to do yourself.
If you're going to try to sneak in a chat GPT to give you the answers,
I'll warn you that most chat GPTs go right to Wikipedia,
which is one of the worst sources for actual factual information you could ever want to use.
And they'll give you answers that will look like, well, a computer gave me this answer,
artificial intelligence gave me the answer, and it will be the wrong answer,
because the chat went to a very unreliable source for its information.
So be cautious if you're going to try to sneak a chat GPT in here.
It might not be a good idea.
Other terminology, I mean, the matching, okay, let me tell you about the matching section.
There will be one which will be matched to term with the definition.
And then there will be one where I'll have you match presidents with a keystone of their economic policy,
that lecture I gave you.
So in other words, you would have, I will give you a list of presidents from Eisenhower
through Kennedy, Johnson, Nixon, and then Ford, Carter, and Reagan.
And I'll give you some term that was intimately associated with one of those presidents,
and you make the match.
Like do one like moral equivalent of war or OPEC oil embargo or Camelot
or something like whip inflation now.
And you would have to match it to the president.
That would be the other matching section.
So you'll have two matching.
They're generally, the score on those, I put those in there because most people get them.
Now I warn you though that each of these matching sections has distractors.
In other words, there will be more possible answers than there are problems.
The distractors would be answers that don't go to any of the problems that I list on the other side.
So that's just to keep you on your toes a little bit.
So there might be five presidents, but there might be five terms,
but I might give you a list of seven presidents.
So be careful on watching out for the distractors in that.
Okay. Going through some other, just a little bit more general comments.
On bonds, make sure you know the difference between a bill, a note, and a bond.
Make sure you know the difference between the residual claim and the prior claim.
Who has the prior claim to the cash flows?
Who gets paid first?
Who gets what's left after the other is paid in whatever is due for the period?
Let me dig through here.
Terms, going back to terms, you've had so far 55, about 55 new terms
or much sharper definitions of terms in this half of the semester.
By the time you finish at the end of the semester, there will be 116 or so terms.
But for this side of it, I mean, they can go anywhere from, like I said, liquidity, cash, money versus capital,
primary versus secondary, primary and secondary markets, those kinds of terms can be in there.
And you need to make sure that you know them as well as you can.
Now as far as study guides go, first of all, what you're writing here is your primary guidance.
And then from there, the quizzes.
As I've said before, sometimes I just copy and paste a quiz question onto the exam.
I'm lazy.
Or I might copy a question and change a few words or change the order of the answers or something like that.
So those quizzes are definitely one of your best resources for studying.
And then of course the podcasts.
In the first couple of weeks, if you go to the early podcast,
you'll see your notes are very thin compared to what I said.
By now you're beginning to capture more like about 70 to 80 percent.
But in the first few lectures, you might not have gotten more than 30 percent of what I said in your notes.
So those podcasts, especially the early ones, are very helpful to you.
And obviously I have them just as audio.
And there's also one of the sites you have is where the transcript of the lecture is.
So those can help you a whole lot.
Okay, interest rates.
Make sure you know the parts of an interest rate.
What's in the risk free rate?
What's in the risk premium?
And know what kind of balance.
So for example, a car loan.
What would be the parts of the risk premium that would be in there versus a credit card loan or a home loan?
Just make sure that you know that equation and the pieces of it.
I guess I could put the midterm up on the overhead so you could see it.
No, I won't.
Okay, now there will be a question.
I will have something about, I'm not going to have you calculate a free cash flow.
But I will ask maybe, obviously there's going to be a, I had already said there's going to be one where you calculate the change in net operating working capital.
I'll dig in as I did in one of the quizzes where I'll say, okay, what happens if current assets increase?
What does that do to free cash flow?
Well, current assets going up makes free cash flow go down.
I wrote a little diagram there on the board for that.
Well, what happens if your wages payable go down?
Well, wages payable go down soaks up cap, soaks up money, so that would lower free cash flow.
There will be one like that on there.
So make sure you know what the pieces of current assets and current liabilities do to the free cash flow.
Make sure you know what I mean by liquidity and what the liquidity of an asset implies about how your return, you're expected to return on the asset.
In other words, what's the relationship between liquidity and expected return to an asset?
In another relationship, make sure you know what, if I increase the discount rate, what does that do to the present value?
If I increase the discount of the compounding rate, what does that do to a future value?
Make sure you know what I mean by financial intermediation.
Let me go back through here and have a look again to give you some more insights.
This comes from early in the semester.
The difference in costs recognized in accounting versus finance.
And that was the subject of a question on one of your quizzes that you've had so far.
Those are all from a quiz, so I shouldn't have to do much about that.
Let me see, what else? Let me keep going here.
Yeah, that one I've already covered.
Give me a minute here while I look at some other ones just to make sure that we're all on the same page.
Give you as much.
Yeah, make sure you know the difference between spot and forward.
I already said money versus capital, primary versus secondary.
Make sure you know the forms where you find information at the SEC about a company.
What form would you find this on? What form would you find that on?
Remember I went through the tens, the K and the Q, the 8K.
So it's worth it for you to know which ones give you what information.
Let me have a look at this.
Oh, God, I asked that? Whoa! Oh, sorry.
Make sure you know the difference in scale, size of the bond market versus the stock market.
Make sure you know what I mean by flight to quality.
Oh, I went through some of the different securities that are out there.
What does common stock represent?
What does a bond represent?
What do I mean by an ETF? What is an ETF or a mutual fund?
Now, I'm not looking for some technical giant legal definition just overall.
What are you talking about? If you say a security like a mutual fund, is that a company?
Is that a stock? Does it represent the residual claim to cash, free cash flows of some corporation?
What does it mean? What is an ETF? What is a common stock? What is a bond?
There's one that I will give you a little bit on it.
You've got a couple of annuities. And I might ask you, you've got, one of them is an ordinary and one is an annuity due.
They're all the same, but which one has the larger present value? Which one has the larger future value?
Know what discounting and compounding do in those cases.
That one could drive you crazy thinking about it, overthinking it.
It's best to just draw a little timeline, two little timelines, and look at one, the ordinary, coming back and going forward.
And then the ordinary, coming back, and then the ordinary going forward to the end.
And then the annuity due, coming back to the beginning and then going forward to the end.
It's the best way I can tell you to think about a problem like that.
Of course, obviously, I'm going to ask you, I told you I was, I'll remind you, I'm going to ask you what's the relationship between a bond price and its yield.
I've said that every day so far.
I've told you enough. It's your turn to ask me questions.
Yes?
So the entire exam is administered online over here?
Yeah, you're right here. You're not going to do it offline. Don't send me an email.
I'm going to take this at home. You're in here, password protected, and all that good stuff.
Yep, 75 minutes. And if I'm estimating based upon I'm taking it myself and I give you about twice as much time, something like that,
it should take you about 45 minutes to do the exam, which means that you can go back, especially doing your calculations,
run those through one more time just to make sure you've got everything right.
And make sure that your numbers in, Canvas seems to have a thing about sometimes making a comment to a decimal or something like that.
Just make sure that the answer is right.
Be careful about second guessing yourself on multiple choice kinds and true and false questions.
That's more often you go from a right answer to a wrong answer.
That doesn't mean you don't go back and check and make sure, but don't rethink your entire thinking
unless you're really unsure of what you put the first time in there.
Yeah, anyway, yes, it's in here, 75 minutes, regular class time on Wednesday,
and then you're done until we come back to begin living the second half of this dream called FIL 240.
Other questions you have for me at this time?
Now, my teaching assistant is in his office tomorrow at his times that are in the syllabus,
and I'm in my office tomorrow at my times are on the syllabus.
By all means, if you have quick questions or deep questions, come in and ask them of us.
We're looking forward to seeing you.
If you don't have any questions, that's all I have for you.
I thank you.