REVISION: DMS FIN101 Business Finance

This Revision Guide/Check List/Practice Questions is/are to assist the students in their
preparations for their own revision. This guide is not meant to be comprehensive. Rather, it
serves to guide students to key points in the course. All materials in the study pack, unless
specifically stated otherwise, will be included in the examinations.
Use the 5 Ws as a guide:
1) What? What is the issue?
2) Who? Who is/are involved?
3) When? Under what circumstances?
4) Why? Why is there a problem? The causes?
5) hoW? hoW can we solve the problem?
Lecture 1
You need to know the job nature of the financial manager, who has to make decisions on a cash
flow basis. He/she must take into account of the tradeoff between risk and return, and the goal of
the firm. Due to his/her position in the company, he/she must discharge his/her duties in an
ethical manner. At the same time, the firm must address the agency problem, and find ways to
align the managers interests with the shareholders.
Lecture 2 & 3
You need to be able to calculate all the financial ratios of the firm. The formulae sheet will be
provided in the examinations. You will be required to do a time-series and cross-sectional
analysis. Use the good, ok, and poor categories to help you. Remember to summarize the
analysis, linking all the relevant issues together in a logical and sequential manner. Nevertheless,
you also need to be aware of the limitations of ratio analysis.
You must be able to calculate the EVA of a firm and interpret on whether the investment
contributes to the wealth of the firm.
Lecture 4 & 5
In managing a firms NWC, the firm must be aware of the tradeoffs between having its liquidity
risk and the return for the firm. Having more current assets gives the firm more buffer to pay off
its current liabilities, but the firm would experience lower returns due to low returns from current
assets.
You must be able to calculate the financing strategies for the aggressive and conservative
approach. Keep practicing on this quantitative section.
Cash is an important concept in finance. You must be able to appreciate the dilemma in holding
cash and how Marketable Securities may be used to manage this issue.
The OC and CCC are important concepts on how a firm can improve its cash management.
Simple calculations involving the CCC will be tested. You will be tested on how you may reduce
the CCC in order to improve on your cash management.
You must be able to explain Disbursement and Collection floats and how they are affected by
different parties delaying the transfer of cash.

It is very important for a firm to be able to collect its accounts receivables so that it would have
the cash to pay off its liabilities. How do accounts receivables build up? As a result of the sales
process where the firm gives its customers time to pay, it would naturally lead to more accounts
receivables. We can decide on the level of accounts receivables with our credit policies. The 5Cs,
relaxing/tightening of the credit policy and credit monitoring techniques would have a great
impact on the level and quality of is accounts receivables. You must also be able to discuss how
the firm may improve its collection of its accounts receivables.
Lecture 6
When a firm buys goods on credit, it will incur an increase in accounts payable. The credit terms
may entice you to pay early if you are able to get a discount. You need to be able to calculate the
annualized effective cost of giving up a discount. You must compare this cost to the cost of
borrowing from a bank.
You will need to calculate the effective rate (annualized) for the normal and discount loans. You
must be able to differentiate a fixed-rate loan and a floating-rate loan.
In obtaining a loan, a firm can seek either unsecured or secured financing. For the latter, you may
need to put up collaterals such as accounts receivables and inventory. You need to show
understanding of the issues, using the risk of default as the basis, for the need for collateral.
Lecture 7
You will have to use the Financial Tables (FVIF, PVIF, FVIFA, PVIFA) to calculate the values
of the cashflows, including annuities and perpetuities.
Lecture 8
You have to be able to calculate the initial investment, relevant operating and terminal cash flows
associated with a proposed capital expenditure.
Lecture 9
This is a very important lecture as the tools learnt here are fundamental to your studies in Finance.
You must be able to calculate, interpret, and evaluate the payback period, NPV & IRR.
Lecture 10
We need long-term financing to finance our fixed assets and NWC. Using the risk-return
tradeoffs, show why debt financing is important. Illustrate how financial leverage can improve
the ROE. As interest expense is a tax-deductible expense, explain why it further reduces the cost
of debt financing. Despite these, what are the disadvantages of using debts?
You have to list down the factors influencing the interest rates for long term debts.
Other than long term loans from the bank, a company is also able to raise long term debt
financing via bonds. You must be able to describe the characteristics of a bond and the additional
features that may be added to alter the cost of borrowing.
We can either buy or lease an asset. You must be able to differentiate an operating and financial
lease, as well as to list down the advantages and disadvantages of leasing.

Lecture 11
As owners, shareholders bear the ultimate risk. Show why and how shareholders are compensated
in terms of capital gains and dividends. You have to list down the various ways and reasons a
firm may raise equity capital, such as IPO, rights, private placement & venture capital.
You have to know the differences between equity and debt financing: management, claims
priority, maturity & tax-treatment, as well as between preferred equity and common equity.
Lecture 12
You have to list down the factors that influence the movements of exchange rates. You will have
to calculate the cost of hedging and/or profit and loss using the forward contracts and options, as
well as profit/loss if the position is left unhedged, from the importer/exporter viewpoint.