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.
Now I'll start out the class with just the usual look at the numbers.
And this is to the purpose of preparing you for the exam because I will do a screenshot of a stock on the exam
and I will ask you questions from that screenshot so here's an opportunity to see that in action
and I'll get the low down on what exactly I'm going to be asking you about it.
But to start it off, of course, we should have a look at the overall markets.
And they were in a grumpy mood all day until just about 15 minutes ago,
suddenly they had a surge up into positive territory, at least the S&P 500 and the NASDAQ.
Now the Dow is still a little tiny bit down, but it's trying to find its way back up into green territory.
So a bear day, a weak bear day, is turning into a weak bull day, but that's about all you can say.
And of course we can look across here, S&P 500, Dow 30, those would be indexes, not exchanges,
but the NASDAQ doesn't have numbers so that would be an actual exchange.
I'll ask about that on the exam and it's easy to tell an index from an exchange, an index will have a number after it.
S&P 500, Dow 30, Russell 2000, so those are indexes. NASDAQ, NYSE, those are exchanges.
Coming over here and having a look at crude. Crude had been above that 79 resistance,
but it chickened out and now it's coming back down below it.
So that's good news is we aren't having some kind of a surge in oil prices because of some crisis situation.
Most of this movement right now is just supply and demand forces moving it around,
but mostly probably demand for gasoline and diesel and all that good stuff.
So nothing much there. Gold is a little more of an issue.
Gold has had a surge upward and that's kind of a sign that the gold bugs are getting worried about a financial apocalypse or something.
So we'll let them worry about that. It looks like everything else is pretty calm right now, no fear or worry.
Now over here the 10-year bond, we see that the yield is up and it's up about almost four basis points.
Nothing spectacular, but the important part for the exam says, okay, yield is up, that means the price is down.
Price would be down because the supply of bonds in the open market is increasing.
In other words, they're selling of bonds, investors getting out of bonds.
Getting out of bonds means that the price will fall and that will cause the yield to rise.
And if you can follow that chain of logic, there's a question that walks you through three drop-down menus
in one sentence about a bond yield doing something.
Bonds have dropped three basis points.
This means that supply or demand, you choose the one, has increased, decreased, causing the price to increase or decrease.
So you follow through on the three pieces of that and you'll get to the end.
Now over here, just a quick look at what happened overseas.
Last night, Tokyo was up and then it just slowly slid away.
There was a little surge at the end there, but whatever good news was pushing the bulls to buy in the morning,
kind of fizzled out later in the morning and they just sort of petered out, finished up a respectable half a percent, but there's that.
Now London came along and it was bad all through the day.
Finally, whatever bad news kept hammering the market downward eventually stopped happening
and the market just settled on this lower level for the rest of the trading day.
And it finished off about a half a percent, a little more than half a percent.
Nothing big there.
Now let me take you on a walk through what will be like a screenshot that you would see for the exam.
Let me do Blockade Martin, LMT.
The first thing is I would say, okay, what exchange is this trade on?
Well, it has LMT, that's three letters. That would mean that it is a New York Stock Exchange stock, most likely.
If it were four letters, it would be a NASDAQ stock, but we see here LMT is three letters
and if you look right below it, it'll even tell you this is a New York Stock Exchange stock, NYSE.
Now don't be fooled, right next to it you see NASDAQ real-time price.
The NASDAQ there just says that's where it's being quoted.
NASDAQ quotes everything, almost. Pretty much everything.
So just keep in mind that whatever stock you see, I'm going to ask you what its exchange is.
You answer that it is, if it's one, two or three letters, NYSE, and you can look right up here and see it.
If it's four letters, it would be a NASDAQ stock.
Now the next thing that I would go through is looking at the screen's numbers.
The first thing I would do is I'd say, okay, you go long 100 shares or you sell, you go long one round lot
or you sell around lot. Now go long means buy.
So that's going to be the first thing that I do. You go long or you sell around lot.
And then I'll say, what happens? Do you pay or do you receive? That's the first thing.
Well, I'm going long. If I'm going long, I would be paying. If I'm selling, then I would be receiving.
But then I'd say this, okay, let's say that you go long. Would you pay $43,335?
Would you pay $43,274? Or would you pay $43,307?
It depends what number. You wouldn't use this number right here. That you would not use.
The $43,36. It would be the bid or the ask.
Now if I'm buying, I will pay the ask. So in this case, the answer would be in the multiple choice,
getting that twitchy crap out of the way. I would pay $43,307.
That's how the question would be worded. I'd pay or I'd receive and then I would give you different amounts of money.
Just look for the one, if you're buying, it would be the ask times $100. If you're selling, it would be the bid times $100.
If you're buying, you would pay. If you're selling, you would receive. So that would be one.
Now another one that I would ask you is this. I would say, which of the following is correct about the risk of the stock?
It is riskier than the market. It is about the same as the market risk. Or it is less than the market risk.
In this case with LMT, it's below one, noticeably below one. So it is less risky than the market.
So I would ask you that. The next thing I would say is relative to the market, the intrinsic value.
Is this stock overvalued, approximately appropriately valued, close to the intrinsic value, or is it undervalued?
Now in this one, it's a little bit undervalued. The one that you'll get will be pretty obvious.
It'll be way above 30, really close to 30, or way below 30. So in this case, it's a little below, so I might say it's a little undervalued.
So that would be the third question that I would ask you on a stock screen for this exam.
You all with me here? No you don't.
Well, is this company profitable? Well, I look right down here at the EPS and it's not just positive, it is very positive.
This is a very attractive stock.
Now remember, the PE ratio, if it's not there, that means that this company is losing money. That's all it means, is that the company is losing money.
It's a negative EPS. So if you don't see an EPS, that would mean that this company has a negative, if you don't see a price earnings ratio, I should say,
that means that the company is losing money. I said that wrong the first time.
Okay, that is the stock screen. Now let me close this off so I can use my exam as the guide.
Well, I suppose I could just leave the exam, let you see the exam.
Okay, down to the meat of the review. And this is your study guide.
The teaching assistant has some paper ones, or you can have an email if you want, of a written version of this, a little somewhat of this.
But here's how it goes. You're allowed a 4x6 note card, front and back, your financial analysis formulas sheet that's in files in your Canvas folders,
and you can use a financial calculator if you want, TI-83 Plus, physical or virtual, and your computer. Excel is what I would expect you to use on this exam.
And you have a template that should get you through anything that would be a mathematical, numerical type of problem on the exam.
Now I caution you not to try to sneak a GPT, a chat GPT, to help you with other things in here, because chat GPTs are really unreliable.
Almost all of them run right to Wikipedia, and then you get bad information, because Wikipedia is just riveted by false, misleading, and unreliable information.
So if you ask one of my questions, my multiple choice questions of a chat, you're very likely to get the wrong answer.
That's how unreliable they are, because they're all using the freebie Wikipedia. But anyway, those are the things.
Now as far as questions go, there are, by count of question numbers, there are 36. However, there are parts of questions, now you have two matching sections.
I'll talk about those in just a minute. So one of them has five matches, and the other has four matches, so that takes you up nine more from 36 to 45.
And then some of the questions have multiple drop-down mentions. None of them will be where you actually have to type in a word.
I've found that I get so many different misspellings that I'm having to chase down all the different misspellings.
So they're drop-downs. So there are maybe three, I think, that have a couple of drop-down menus in them.
So that's kind of like up to maybe about total 50 questions. Now the questions range in point value.
From 2 to 2.5, those are more of the easy or moderate. And then you have the 1 to 2. Those can be a little bit on the more robust side,
what I call my level three more difficult questions. So overall, you should attack, now all the numerical questions where you would need to use calculator or Excel,
they're at the bottom. So that keeps you from wrangling with those and burning up time when you could be doing questions with good point values higher up earlier in the exam.
Now as far as the matching goes, there are two different matching. And each of them has what are called distractors.
In other words, five problems, but you might have eight or nine choices. And so that means that there are more possible answers than actual answers.
As I said, those are distractors. Just be aware that you'll see that in the two matching sections.
Now the first matching section is more words and match them to a definition. The second matching is words or terms and match them to a president from that lecture I gave you.
That spanned, in other words, you could have, you'll have a word like whip inflation now. Well, which president would that be associated with?
You would have Eisenhower, Johnson, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, and Reagan. And you'd have to say which one that was.
So that would, and it would go down through there with all of those different possible, different terms that were closely associated with a specific president.
So make sure you know those. Generally speaking, the matching is high, people get all of them or almost all of them. So they help with your overall score for the exam.
Now, getting down to meet. As far as the questions go, the math questions. You will have a present value of an annuity.
You will have a future value of an annuity. You will find a loan payment. You'll have to find a loan payment.
You will also need, have to find an annualized return on an investment.
That is the second worksheet in that spreadsheet, present values and future values.
So if you don't have the latest one, be sure you've downloaded the latest version of that Excel spreadsheet from your, in your Canvas files.
And then you'll also calculate a change in net operating working capital.
Now, I won't have you calculate a full-blown free cash flow on the midterm.
It'll just be the one where you take the net operating working capital for the current year minus the net operating capital for the previous year.
Current assets minus current liabilities. But if you can get it into the spreadsheet, you should be able to, if you can get it into a nice spreadsheet very quickly,
just open up an extra worksheet, put in your current assets for the two years, current liabilities for the two years,
take the difference of those for each year and then subtract the two net operating working capitals. So you can do that one on a spreadsheet pretty quickly.
Just get the numbers in there and do the little arithmetic.
And you might even want to put that little formula in a little, in a corner in your note card. But that's your choice.
So those are the direct math questions on the exam.
Now, there are other questions that have numbers in them, but you are doing more of an analysis or saying what this means.
Specifically, I will maybe say which ratio is larger.
And you would look at the formulas and say, okay, well, the only thing that's different are the denominators.
So the denominator of this one is bigger than the denominator of this one.
So that means that the first one is smaller than the second one. Something along those lines.
Or I could just say, okay, which is bigger, the acid test or the burn ratio, the cash ratio?
I could do that one. Or something like, I don't know, which one is bigger, inventory turnover ratio or total asset turnover ratio?
Looking at the numbers, looking at which one mathematically would be just by its nature larger or smaller.
And a few questions I might say, okay, is this a possibility, this ratio?
Could you have, let's say, a net margin less than zero?
Well, yeah, if earnings are less than zero, you certainly could.
Could I have a plow back ratio that's less than zero?
Well, no. The least amount that you can put back in from your retained earnings is zero.
So it couldn't be negative.
So there will be somewhere you'll have to think your way through it a little bit.
Could the number be smaller or larger than what I'm saying its possible limit is?
But those, just think your way through them and look at the formula sheet to determine, can this happen?
Now, in some cases, it could happen, but it would be a very bad thing.
And times interest earned below one means that your earnings before interest in taxes isn't enough to pay your earnings.
So in some of them, it's just not advisable.
So there will be that kind of, just a little bit of going beyond the math and asking, is this possible?
Is it a good idea? Is it something that we should do, we should have?
Okay, that is ratios.
Now, getting down to some meat.
Definitions are meat and potatoes of an introduction to finance course.
So obviously I'm going to ask you questions about what does this mean?
Like liquidity, capital, money, primary market, secondary market, spot, forward,
investment bank, commercial bank, financial services bank, forms, like form 10Q, 10K, 8K.
Where are they? What can you get from them? What information?
Other terms. I've gone through, in the first half of the course, I go through approximately 55 new terms
or sharp, clear, specific definitions of less form, that are used less formally by people who are not business people.
So in this case, there are terms that would be used by a common person, which would not be what we mean in our world.
So make sure that you can go through this. By the time the semester is over, we'll have, if I'm doing the count right,
116 terms. Right now it's at about 55.
And just dig through and you'll see how many are in your notes.
And another thing about your notes. First and foremost, your notes are the best place for you to study.
However, they are probably not going to be very good in the first couple of weeks.
There's a development period. That's why those podcasts are so useful to you.
If you have the time, go back and listen, especially to those early lectures, where the whole foundation was being laid out.
Didn't sound like it, but that's how it is.
And if you want the transcript, I set out an announcement with some of the places where you can listen to my podcasts.
The one at RSS has the transcript as well. And it's pretty darn accurate.
It's very accurate, in fact. It's a good transcript.
So you can actually, if you want to go through and actually see the notes of the lecture literally, orally, has a happen.
RSS is the one you would probably want to use. Let me do something real quick here, if I can.
Now here was one lecture podcast. You can go in there, and the links to some of my different podcasting sites are right there for you to use.
Now I do see that maybe 30 of my 400 or so students have actually been here so far.
Now this is the core one, the one that was the original from 2007 or something like that.
And of course, that's the one where you can just listen, click and listen.
You can also go over to Apple iTunes, which has been picking up my feed for almost as long as I've had it since the first decade of the 21st century.
So you can listen to them there. That's a nice place.
Now the last one here, RSS, this is the one where the transcripts are.
Now these are the audio. If you click here, instead of on the play, if you click on a lecture and then click on transcript, there's the transcript right there.
So you can play it, and you can see, oh god damn, oh audio.
But it will walk you line by line through the transcript. As it's playing, it will just highlight the line that I'm on as I'm speaking.
So if you want the authoritative notes to the course, there they are.
That doesn't mean you stop coming to class, for heaven's sakes, because obviously you wouldn't see what I write on the board and the graphics and all that.
But it's still an excellent resource if you want to grab some quick information.
And obviously you can go back here, let me come back to the upside, and you can get to any lecture that you want along the way.
Now these take a lot of time to create these podcasts on all these different sites.
I'm not doing it for my health, I'm doing it for you, because I care about you.
More, I want to say go to the podcast, you'll hear it there. But anyway, enough of that.
So that's a resource for you as well.
Now one last one, of course, are the quizzes. Those quizzes have a lot of information in them that I might use on an exam.
As a matter of fact, sometimes I'm lazy. I copy a question from a quiz and I paste it into an exam.
Sometimes word for word, sometimes I might change a word or scramble the answers.
But that's another great place to get a study for the midterm exam.
So that's there for you as well.
Okay, now I'm going to tell you some, you should know this.
You should know the difference between costs in accounting, what costs accountants use, and what costs financial professionals use.
Make sure you know that.
Make sure you know the difference between a bill, a note, and a bond.
And know the difference between the seller and the investor or the buyer.
Who is in a loan agreement, who is selling the debt instrument, who is buying the debt instrument.
Now that takes us to financial intermediation.
Make sure you know what that means.
What is it? What are the requirements in financial intermediation?
You need definitely to know the difference between stock and bonds.
And in that same regard, which one has the prior claim to cash flows?
And which one has the residue or the residual claim?
What investors must be paid first?
And then when they're taken care of for this current time period, which investors get what remains, the residual?
You should know the difference between market price and intrinsic price, or market value versus intrinsic value.
Which one matters in the long run versus the short run?
Make sure you know the difference between spot and forward.
I went through this just a minute ago, I think, but make sure you know what I mean by common stock.
What I mean by a bond as a security.
What's an ETF? A mutual fund.
You know, this isn't something where you need to know a long legal definition.
You just need to know what are these animals.
Interest rates.
What are the parts of an interest rate?
For example, what's in the risk-free rate?
What's in the risk premium?
How do the parts of that risk premium change depending upon what kind of a loan you're talking about?
The forms that I've shown you, the 10Q, the 10K, the 8K, what do you find in each of those that might be important?
Something that I've brought up that you will find in only one of them.
I could say, well, where would you find this piece of information?
I'd give you a choice of forms, and you have to figure out which one it is that you would find that in.
I might even throw in a few distractors.
Know the difference between compounding and discounting.
I did this on a quiz. I'll do it again on the exam.
Yeah?
You said compounding versus what?
Discounting. Compounding versus discounting.
One is to find present values. The other is to find future values.
There will be one, and I did this on a quiz, where I will ask you for the effect on free cash flow of some change in a current asset or current liability.
So I could say, okay, accounts receivable went up. What does that do to free cash flow?
Well, it makes it go down. Or wages payable increased. What does that do to free cash flow?
Well, wages payable, that's a current liability, goes up. That means free cash flow goes up.
I did a little diagram there on the board. Current assets go up, free cash flow goes down.
Current assets go down, free cash flow goes up. And opposite for current liabilities.
Might want to put that somewhere in a little corner of your notes, too.
Make sure you know the relationship between liquidity and expected return.
In other words, as liquidity of an asset goes up, what does that mean about what you expect the return to be?
Now, there was a one through one, and this is also well laid out in the book, about different kinds of financial intermediaries.
Investment banks, commercial banks, financial services companies, those kinds of animals.
What would one do that the other would not do? Know the distinctions.
I certainly don't need you to say everything that each one of them does,
but there are some clear lines that distinguish one type from another type.
Now, there's one, and I always throw a bone about it. I don't go into too much detail,
but there's one where I say you've got two identical annuities, except that one is ordinary and the other is due.
In this question, I'll say, okay, what would be the relative sizes of the present values or the future values?
In other words, these are two identical, except one has payments at the end of periods,
the other has payments at the beginnings of periods.
What does that mean about their present values relative to each other?
Or I could ask about their future values relative to each other.
It sounds complicated, but if you draw a timeline, just a couple of years, just make it a couple of years,
and just look at what happens as you discount the two and then as you compound the two.
What happens to their relative values when you find their present values or when you find their future values?
I won't tell you any more about it, but I always throw up this bone to give you a way to kind of think about it
and practice it before the exam.
Now I'm obviously going to ask you about the relationship between bond price and bond yield.
And of course, I'll probably ask you about beta, what it's telling us.
It's just one of those things that's important to start talking about early in the course
before I even formally introduce it with a formula and all that.
Okay, I think it's your turn.
Ask me questions.
Yeah?
Intrinsic value?
That's the long-term value of a stock.
The market price varies around it, above it, below it,
but the intrinsic value represents the true present value of all of the future expected cash flows of the corporation.
The market price can go up or down based upon bulls and bears fighting it out day after day,
but the intrinsic value is what is the underlying price.
Value, yes?
What are the present values?
Again, present values and future values.
Give me a second here.
I'll even show it to you again.
Bear with me while I get that up.
And 240 and student view.
And you should see in files, you go down to your spreadsheets,
right here, present and future values.
Now make sure that you have the latest version of this because it's the one that has the worksheet in it for finding annualized holding period returns.
I mean, you can do those by the formula.
It's not that hard.
I will give you one that's in years, okay?
Watch this not be the latest one.
I'll go through and make sure I have it.
Yep, I got it.
It's there.
So this is the one for annualizing.
The one that was originally there when I was doing present and future values of annuities and loans, that's the first sheet.
The second sheet has four years between, days between.
It'll be a years between question.
Just make sure you put in the numbers right.
Something that I saw happen on the quiz, there were a surprising number of people who got an answer wrong because they forgot to put in the problems APR.
What they had, I couldn't figure out why you were not too far off, but you were off, and it was because you had used the APR that was already in the template instead of the one that was in the problem.
So make sure, that's one thing I give you a caution, make sure you put in all of the numbers that are for that, for the problem.
That's where you can get burned on it.
Other than that, it should give you your answers as fast as a financial calculator would, probably faster.
And certainly a lot faster than if you tried to use those tables that you used in accounting.
So take full advantage of that.
It's not there, you don't need to look around and see if anyone's watching.
I expect you to get comfortable with getting your answers using Excel, because the business world just uses it all the time now for everything.
It seems like they even use it for things that they really shouldn't use it for.
Okay, other questions that you might have?
Anything else you got? Yeah?
Can you show us how to download the Graphic Map for your computer?
Sure can. Do you have a Mac or a PC?
PC.
I'll show you then. Okay, watch this. It's actually, bear with me, let me go back in here.
And Access denied my ass.
Show the screen.
Huh?
Show the screen.
I have to show the screen.
Do you see that?
Don't tell me my access is denied. Oh, leave student view. Oh, I was in student view.
Sorry about that. Let me get back here.
Had me worried, I thought they'd fired me.
Student view. Okay, watch. Go to your files and you go clear down here to the bottom.
Now you'll see Virtual TI-83 Calculator.
Now you click on that.
No, no, no. I do that. Does anyone else do that where you don't download it, you accidentally just click on it?
Watch. You go download.
And then the Virtual TI, it's a self-executing zip file.
And it's going to say, okay, here it is right here.
So what we're going to do is we're going to unzip it.
Now on these computers they make it very difficult for you to unzip something.
Seven-zip. Should do it.
Okay, extract the files.
And what you'll see is it will tell you where do you want to put this.
You really, I mean, you can put it about anywhere.
It would go to downloads automatically, but you might want to put it in documents, in your core documents.
Okay? Okie dokie and say okay.
Now if I go over here to the documents, I'll see it right here.
Now you double click on it, and you'll have to double click again until you get to a folder called VTI-83.
Now when you double click on that, you're going to go down a couple layers.
There's an actual icon file. That means it's an executable.
That's the calculator.
Now you can leave it there and just go there every time you want to use it, but it's a lot nicer if you right click on it and send it to the desktop.
Send to the desktop as a shortcut.
So in other words, you're just going to extract the files and then go down until you find that blue icon and send it to the desktop.
And once you send it there, your TI-83 is available all the time.
See it?
And then you can double click on it, and there it is.
So first you download it, then you extract the files from the archive, and then you go down all the layers of folders until you find that blue little icon and send it to your desktop.
And then it will be there every time you click on it.
Now to get out of it, right click, exit without saving state, and it will go away.
Anything else?
Eat your Wheaties.
Any lecture is usually up by 7 p.m.
I get back to my flat at about 5.30, and it takes me about an hour, hour and a half.
And so it comes up, just be a little patient, because it will come up though tonight.
That's all I have for you today. I thank you.