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Alan Cring Productions in association with the Emergent Light Studio presents

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the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.

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This is Business Finance, FIL 240 for spring semester 2024.

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Today, review for the midterm exam.

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As part of the review, I will go through a look at the numbers, as we always do at the beginning of class.

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This is pursuant to the midterm exam because one of the sections of the midterm exam is for you to look at a screen.

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I'll have a screen capture of a stock, a common stock, and you will answer some questions about it.

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This is part of the review and I'll key it to that.

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But before we do that, just an overall look at the numbers to make sure that you are on key with that.

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There will be a few issues in this review right here that will serve you well for the exam.

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As you can see, this is a bare day, but it is certainly not anything majorly catastrophic.

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It's just a little bit of a down day with not a major bare day, but it is a bare day.

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You can see that the markets are down, not much, but there is a consistency across the board.

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So make sure you know what I mean by a bare day, by a bull day, and all of that.

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And also, as we're looking at the S&P 500, the Dow 30, the NASDAQ.

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Well, those would tell you that we have two indices here.

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The ones with numbers are indexes, and then the one that doesn't have a number is an exchange.

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And of course, the Russell 2000, that would be an index of 2000 stocks.

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So going over here, you can see that gold has really taken a jump.

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And so apparently, the gold bugs are in the mood to put money into the possibility that the world is coming to an end.

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We'll see how that plays out.

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But over here in the bond market, 10-year bond, it has been up all day.

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And you can see that it is up 4.5 basis points.

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It spiked up, and as you can see, though, after that, it just stayed there.

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So in other words, there was a surge of demand for bonds.

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Well, I shouldn't say that.

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There was a surge of supply.

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The markets, there was a dump of bonds, because the yields are up.

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That means prices are down.

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So that tells you, okay, something has spooked the bondholders, and they've sold bonds, dropped the price.

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That means that the yield has gone up as a result.

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One of your questions on the exam will be to follow that chain of logic, three drop-downs.

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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,

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means a price rose or fell, or something like that, which means a supplier demand did something, which means that yields did something.

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We'll see if you can follow that through.

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I'll talk about that a little more later.

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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.

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It's just drop-downs.

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So that will help you with that.

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Okay, we see that London dropped through the day, and I think they're finished up now.

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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.

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Tokyo, on the other hand, had some good news that pushed the market up when the market opened last night.

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But then it just kind of slid back down slowly through the day and finished up just a half a percent.

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Okay, now let me take you through.

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I'm going to pull up a stock here.

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I will do a screen capture, and I'll pull up Lockheed Martin for lack of any better inspiration.

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Lockheed Martin.

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Now the first thing that you'll have a screen, it'll just be a capture.

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Really?

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There we go.

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It'll just be a screen capture and a couple of things to give you a good flag on it.

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Lockheed Martin is LM&T.

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That's three letters, and you can see right now it is a New York Stock Exchange stock.

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I'll ask you, what market does this trade on?

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Remember that four letters would say that it is a NASDAQ stock.

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Three, two, or one, most likely an NYSE stock.

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A little mention here.

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Don't be bluffed.

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You see that NASDAQ is actually there.

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Don't let that fool you.

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NASDAQ is just the quotation service for everything.

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You look at the number of letters, and you look at the first thing that's showing there, and that's the NYSE.

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Taco Bell last night was not doing so well.

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Okay.

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Now we're good.

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Okay.

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So now, first things first.

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I will say, okay, you went long a round lot of LM&T.

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That means that you bought 100 shares.

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And I would say, okay, which of the following happened?

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Now I will say, okay, you received $43,250.

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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.

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$43,221.

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In other words, I'll give you six choices.

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First of all, you went long.

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That means that you bought.

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So you're paid.

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Now if you're buying, that means that you will pay the ask.

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If you can remember all that, you've got a nice little series of three or four questions.

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One of them.

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If I say you go long a round lot, that means that you bought 100 shares.

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If I say you sold a round lot, that means that you sold 100 shares.

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A round lot is 100 shares, and I say a round lot in the problem.

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And if you're buying, you're paying.

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If you're selling, you are receiving the money.

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And if you're buying, you'll pay the ask.

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If you're selling, you'll receive the bid.

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Okay, that's one of them.

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Now another of the questions I'll say, okay, the risk of the stock.

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This I'll say it will come in the form of this stock is riskier than the market.

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This stock has about the same risk as the market.

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Or this stock is less risky than the market.

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So that depends upon the beta.

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In this case, your answer would be this stock is less risky than the market.

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And then I'll ask you, based on the price earnings ratio,

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this stock is overvalued relative to the intrinsic value.

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This stock is about at the intrinsic value, or this stock is undervalued relative to the intrinsic value.

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There'll just be a drop down.

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You choose which one is at correct.

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And in this case, you'd say this stock is less risky.

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I'm sorry.

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This stock is undervalued relative to intrinsic value because it's below one.

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And that will be the screen.

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It'll be a part of the exam.

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It'll be a screen capture, a nice graphic, and then the questions that I gave you.

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And all I'm asking you to do is show me that you know how to read these screens.

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Looking down here for, yeah, okay.

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And it won't be a complicated one.

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It'll be straightforward.

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It won't be anything, any rocket science, scientists.

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But that's some fairly easy points if you know how to read the screens.

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Let's see now.

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Okay.

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Let me get out of this for a little while here, and we're going to talk about the exam.

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But that was starting it out.

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Okay, now, as far as the exam is concerned, the number of questions is 36.

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However, there are some that are multiple part.

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You have two matching sections.

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So one of them is like five matches, and the other is four matches.

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So that takes you up to 44, 45 questions, I guess.

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And then some of the questions, there are multiple parts to the answer.

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You'll have a series of drop-downs for the different answers.

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So you won't have to spell any words, so I don't have to correct any for misspellings that I didn't see.

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So overall, you would say that there are about 52 to 54 questions or parts of questions.

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Now, the questions vary in points from two and a half points down to one point.

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Two to two and a half would be somewhat of the relatively medium to somewhat easier.

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The one to two pointers would be more of the more difficult ones, or something that's just a gimme question kind of thing.

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I try to balance the loads so that those numerical ones, for example, they're two-point questions each.

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They're not the two and a half ones, because that can accumulate rather quickly if you're not good at the math.

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Okay, now, you are allowed a four-by-six note card front and back for the exam.

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You are also allowed that financial ratios formula sheet to have with you for the exam.

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You can use a financial calculator like TI-83, physical or virtual calculator.

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And you can use, you should use Excel and the template that I provided for you,

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the present and future values template that will save your bacon.

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If you can use that, you know how to use it properly.

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Get the numbers that I give you into the template.

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You should not have a major difficulty with the numerical, most of the numerical part of the exam.

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Now, as far as the numerical part goes, there will be the present value,

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and now you will find the present value of an annuity.

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You will find the future value of an annuity.

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You will find a loan payment.

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You will also find an annualized return.

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Remember, that's the second worksheet in that spreadsheet template.

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And you will find one where I'll ask you to calculate a change in net operating working capital.

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That should be enough.

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As far as other quantitative, mathy kinds of questions,

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I'm not foreseeing much in the way of calculations, but there will be some numbers.

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As far as ratios go, you will not calculate any ratios.

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But you will have questions where I will ask about ratios.

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Which ratio is bigger?

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The acid test or the burn ratio.

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Which ratio is bigger?

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The inventory turnover ratio or the total asset turnover ratio?

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Along that line, so that you need to know and understand how the formulas are working.

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If two formulas are related, but their denominators are different,

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you see which one has the bigger denominator.

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That one would be the one that's smaller of the two ratios.

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That's a classic kind of question.

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I would also ask you something maybe along the lines of what ratio, what could a ratio not be?

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Well, could you have a net margin less than zero?

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Well, yeah, if the company's got negative profit, sure, net margin could be less than zero.

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But does it have to be larger than a specific number?

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No, the net margin can go from negative infinity to infinity, in fact.

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But other ones, well, times interest earned.

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You certainly don't ever want to see that below one.

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If you see it below one, that would be a very bad thing.

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But other than that, it will be something along the lines comparing two ratios,

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which one will be larger than another.

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Or what numbers could you not see?

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Or what numbers would be of concern to you if you saw those numbers?

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Questions like that.

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Not calculations, but knowing what the calculations, the result was telling you about the ratio

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or the company that is being represented in the ratios.

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So that is kind of numerical, but it's much more of using your judgment,

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using your knowledge of the ratios to answer those kinds of questions.

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Okay, going on.

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Terms and definitions, they are just the meat of a classic FIL 240 exam.

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Knowing what a term means, knowing what the possible different, within a category like banking.

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You need to know what some types of banks can do, what they can't do.

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That would mean that you need to know what investment banks are, commercial banks,

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financial services companies, you need to know what they do.

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What can they do, what can they not do?

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Obviously terms like liquidity.

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I will be looking for, I will give you the option of choosing an answer that you get off the internet,

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which would be wrong.

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Make sure that you get the definitions that I gave you for these.

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It's always important that you know the difference between what the internet can do for you

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and what you have to do yourself.

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If you're going to try to sneak in a chat GPT to give you the answers,

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I'll warn you that most chat GPTs go right to Wikipedia,

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which is one of the worst sources for actual factual information you could ever want to use.

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And they'll give you answers that will look like, well, a computer gave me this answer,

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artificial intelligence gave me the answer, and it will be the wrong answer,

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because the chat went to a very unreliable source for its information.

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So be cautious if you're going to try to sneak a chat GPT in here.

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It might not be a good idea.

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Other terminology, I mean, the matching, okay, let me tell you about the matching section.

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There will be one which will be matched to term with the definition.

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And then there will be one where I'll have you match presidents with a keystone of their economic policy,

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that lecture I gave you.

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So in other words, you would have, I will give you a list of presidents from Eisenhower

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through Kennedy, Johnson, Nixon, and then Ford, Carter, and Reagan.

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And I'll give you some term that was intimately associated with one of those presidents,

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and you make the match.

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Like do one like moral equivalent of war or OPEC oil embargo or Camelot

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or something like whip inflation now.

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And you would have to match it to the president.

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That would be the other matching section.

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So you'll have two matching.

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They're generally, the score on those, I put those in there because most people get them.

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Now I warn you though that each of these matching sections has distractors.

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In other words, there will be more possible answers than there are problems.

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The distractors would be answers that don't go to any of the problems that I list on the other side.

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So that's just to keep you on your toes a little bit.

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So there might be five presidents, but there might be five terms,

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but I might give you a list of seven presidents.

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So be careful on watching out for the distractors in that.

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Okay. Going through some other, just a little bit more general comments.

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On bonds, make sure you know the difference between a bill, a note, and a bond.

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Make sure you know the difference between the residual claim and the prior claim.

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Who has the prior claim to the cash flows?

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Who gets paid first?

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Who gets what's left after the other is paid in whatever is due for the period?

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Let me dig through here.

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Terms, going back to terms, you've had so far 55, about 55 new terms

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or much sharper definitions of terms in this half of the semester.

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By the time you finish at the end of the semester, there will be 116 or so terms.

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But for this side of it, I mean, they can go anywhere from, like I said, liquidity, cash, money versus capital,

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primary versus secondary, primary and secondary markets, those kinds of terms can be in there.

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And you need to make sure that you know them as well as you can.

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Now as far as study guides go, first of all, what you're writing here is your primary guidance.

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And then from there, the quizzes.

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As I've said before, sometimes I just copy and paste a quiz question onto the exam.

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I'm lazy.

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Or I might copy a question and change a few words or change the order of the answers or something like that.

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So those quizzes are definitely one of your best resources for studying.

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And then of course the podcasts.

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In the first couple of weeks, if you go to the early podcast,

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you'll see your notes are very thin compared to what I said.

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By now you're beginning to capture more like about 70 to 80 percent.

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But in the first few lectures, you might not have gotten more than 30 percent of what I said in your notes.

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So those podcasts, especially the early ones, are very helpful to you.

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And obviously I have them just as audio.

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And there's also one of the sites you have is where the transcript of the lecture is.

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So those can help you a whole lot.

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Okay, interest rates.

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Make sure you know the parts of an interest rate.

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What's in the risk free rate?

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What's in the risk premium?

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And know what kind of balance.

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So for example, a car loan.

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What would be the parts of the risk premium that would be in there versus a credit card loan or a home loan?

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Just make sure that you know that equation and the pieces of it.

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I guess I could put the midterm up on the overhead so you could see it.

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No, I won't.

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Okay, now there will be a question.

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I will have something about, I'm not going to have you calculate a free cash flow.

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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.

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I'll dig in as I did in one of the quizzes where I'll say, okay, what happens if current assets increase?

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What does that do to free cash flow?

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Well, current assets going up makes free cash flow go down.

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I wrote a little diagram there on the board for that.

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Well, what happens if your wages payable go down?

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Well, wages payable go down soaks up cap, soaks up money, so that would lower free cash flow.

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There will be one like that on there.

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So make sure you know what the pieces of current assets and current liabilities do to the free cash flow.

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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.

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In other words, what's the relationship between liquidity and expected return to an asset?

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In another relationship, make sure you know what, if I increase the discount rate, what does that do to the present value?

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If I increase the discount of the compounding rate, what does that do to a future value?

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Make sure you know what I mean by financial intermediation.

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Let me go back through here and have a look again to give you some more insights.

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This comes from early in the semester.

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The difference in costs recognized in accounting versus finance.

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And that was the subject of a question on one of your quizzes that you've had so far.

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Those are all from a quiz, so I shouldn't have to do much about that.

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Let me see, what else? Let me keep going here.

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Yeah, that one I've already covered.

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Give me a minute here while I look at some other ones just to make sure that we're all on the same page.

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Give you as much.

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Yeah, make sure you know the difference between spot and forward.

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I already said money versus capital, primary versus secondary.

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Make sure you know the forms where you find information at the SEC about a company.

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What form would you find this on? What form would you find that on?

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Remember I went through the tens, the K and the Q, the 8K.

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So it's worth it for you to know which ones give you what information.

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Let me have a look at this.

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Oh, God, I asked that? Whoa! Oh, sorry.

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Make sure you know the difference in scale, size of the bond market versus the stock market.

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Make sure you know what I mean by flight to quality.

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Oh, I went through some of the different securities that are out there.

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What does common stock represent?

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What does a bond represent?

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What do I mean by an ETF? What is an ETF or a mutual fund?

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Now, I'm not looking for some technical giant legal definition just overall.

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What are you talking about? If you say a security like a mutual fund, is that a company?

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Is that a stock? Does it represent the residual claim to cash, free cash flows of some corporation?

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What does it mean? What is an ETF? What is a common stock? What is a bond?

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There's one that I will give you a little bit on it.

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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.

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They're all the same, but which one has the larger present value? Which one has the larger future value?

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Know what discounting and compounding do in those cases.

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That one could drive you crazy thinking about it, overthinking it.

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It's best to just draw a little timeline, two little timelines, and look at one, the ordinary, coming back and going forward.

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And then the ordinary, coming back, and then the ordinary going forward to the end.

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And then the annuity due, coming back to the beginning and then going forward to the end.

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It's the best way I can tell you to think about a problem like that.

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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.

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I've said that every day so far.

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I've told you enough. It's your turn to ask me questions.

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Yes?

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So the entire exam is administered online over here?

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Yeah, you're right here. You're not going to do it offline. Don't send me an email.

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I'm going to take this at home. You're in here, password protected, and all that good stuff.

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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,

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it should take you about 45 minutes to do the exam, which means that you can go back, especially doing your calculations,

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run those through one more time just to make sure you've got everything right.

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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.

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Just make sure that the answer is right.

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Be careful about second guessing yourself on multiple choice kinds and true and false questions.

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That's more often you go from a right answer to a wrong answer.

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That doesn't mean you don't go back and check and make sure, but don't rethink your entire thinking

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unless you're really unsure of what you put the first time in there.

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Yeah, anyway, yes, it's in here, 75 minutes, regular class time on Wednesday,

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and then you're done until we come back to begin living the second half of this dream called FIL 240.

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Other questions you have for me at this time?

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Now, my teaching assistant is in his office tomorrow at his times that are in the syllabus,

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and I'm in my office tomorrow at my times are on the syllabus.

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By all means, if you have quick questions or deep questions, come in and ask them of us.

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We're looking forward to seeing you.

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If you don't have any questions, that's all I have for you.

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I thank you.