Saturday, February 12, 2011

Principles of Finance DSST

I just passed it with flying colors.. I used the new official 2011 test prep guide that had alot of the questions on the exam or close to it... You can order it from getcollegecredit.com for about 30 bucks.... I used that along with the notes everyone recommended... Thanks guys...My test was heavy on bonds, payback, npv and only a few pv, fv calculations. There were at least three questions regarding EOQ, or economic ordering quantity.

Be sure to study dol, dcl, dfl, and irr. Know bonds, call feature, npv with outflows, break even, total asset turnover formula, which forms you use to calculate roa, definition of beta, capm formula, discount rate formula, effective rate formula, study section on eoq, There are questions about actual and required rate of return.
Things covered different types of ratios (memorize all the types of ratios!) you should know which ones are profitability, asset utilization, etc.
  • I had a couple questions on EOQ, you should memorize the formula and know how to use it.
  • You must know all how to calculate future cash flows using all three methods (payback method, NPV, IRR)
  • There were questions and problems on financial leverage, operating leverage, and combined leverage.
  • I had a couple questions on credit terms (i.e 2/10 net 30).
  • I had a question on calculating foreign currencies. While I studied and knew how to work these problems, the question was weird and I probably got it wrong.
  • Know that common stock is the most expensive investment!
  • Know what beta is and how to calculate CAPM
  • You need to know the steps to go through for determining net income on an income statement, as they will just give you parts of an financial statement and require you to calculate from it.
  • PVIF, PVIFA, FVIF, FVIFA. What's been said earlier in this thread is also very helpful -- make a list of formulas and study them -- EOQ, SML, YTM, and so on -- all the ratios
    . How to use the 4 financial tables you received from Prometric to calculate PV, PVA, FV, FVA, IRR (by guessing based on initial and subsequent cashflows given) and NPV (by subtracting initial investment from the PV calcuated using the table).
    . Cash Discount. Know your terms (eg 2/10 net 30) and the cost of that cash discount. eg. If the net days increased from 30 to 60, how would your cost of cash discount be affected?
    . Components (accounts) of a balance sheet to calculate ratios off of (not in ic).
    . Know your four type of ratios and most popular ones. For example, If I gave you a balance sheet and told you to calculate Debt to Asset ratio, you need to know what values to pick out from the provided balance sheet.
    . Components of a Cash flow statement (high level, not the detail).
    . Know Net Working Capital and the basic balance sheet components that make it up.
    . Formula for DOL, DFL and DCL (degree of leverage for operating, financial, combined) and know what leverage (debt or fixed costs) is and how it relates to assets and equity.
    . Know how to compute EOQ from different variables given. (not in ic)
    . CAPM and Constant Growth.
    . Simple Currency conversion. (not in ic)
    . Break Even Point theory and calc. eg. If var costs decreased, how would that affect BE? incr, decr, no-change, not enough info?
    . WACC
    . Bonds
    . Tax margin. Convert something to its "after tax" value.
    . Systematic and unsystematic risk. (not in ic)
    . Factoring.
    . "Cost of Capital" section in IC.
 You will also have to solve for a recurring annuity payment.
There is a LOT of overlap. PV, FV, all them ratios, payback period, IRR, net present value—I had to relearn it all a year later.
Present and Future Value – You should know what semiannual means.
EOQ – there's at least a couple of problems that require knowledge of this formula and concept
CAPM – I don't recall using the formula to solve a problem, but there were several questions regarding the concept
Tax Margin – two questions regarding that.  Those were two of my guesses
Systematic and Unsystematic Risk – definitely know that.  Despite the advice in the Specific Feedback section, I never got around to looking that up—as it seemed obvious.  It's not—at least not the way these questions are phrased.  You should know this.
Leverage – DOL, DFL, DCL.  The Q(P-VC) formulas won't help you much but the concepts will.  In other words, you aren't going to have to do a raw computation, but you'll have to take it from half-way in and be able to finish and answer several questions relating to how leverage works and how other changes may or may not impact leverage.
Stock valuation formulas – at least be able to recognize them
Foreign Currency Conversion – it's one of the few problems where they give you unfriendly numbers to work with
Cash Discounts
Credit Terms
Net Working Capital
Weighted Cost of Capital
Factoring - know what it is.  Easy points.
Bond debentures, indentures, floating-rate, etc.
Valuation of Stock - I knew CAPM and Constant Growth--which you should know as well, but I didn't know the other P=D/K variations--and I should have.
Payback Period, IRR, NPV –
Statements – there are several questions that require you to know which items are on which statements (Income, Balance) and which to use (and not use) when calculating things like net income, etc.
 Make sure you also know the following well:
Cost of Bonds and Preferred Stock as well as YTM on Bonds. Detailed parts and how to calculate.
EOQ and Inventory (FIFO/LIFO) there were at least 4 questions on EOQ.
Invoicing - Cost of Trade Credit concepts
Effective Interest Rate (what it is and how to calculate)
Source/Uses of Cash and after-tax concepts
Know and practice how to solve time value questions, NPV, IRR, and cashflow problems with the calculator and bond/stock valuation, cost of debt, capital, and other terms.
basic understanding of proforma statements

- Computing "net worth" from a list of figures (not as intuitive as one might think)
- Understand the effects of stock splits/reverse stock splits/stock dividends/cash dividends on retained earnings, par value, stock price, EPS.
- If EOQ goes up by a certain amount, how much does that affect inventory level?
- If cost of capital is X% and internal rate of return is X%, what does that say about the NPV? In other words, it's not enough to just know how to compute IRR or NPV on your calculator, you need to understand the formula and the effects of variable changes.
pay particular attention to the circumstances and effects of the cost of debt. There are at least 8 questions that revolve, at least in part, around this series of concepts.
I had probably 10-12 questions that were to solve for PV or FV or annuities. One combination-type question asks for the future value of an account with different deposit amount for about 5 years, then no deposits for 15 years earning interest, and what is the future value at the end.
I had around 5 questions that were on the CAPM formula (this is where you'll find Beta) where it gave you everything but 1 part of the equation and you had to solve for the required rate of return. You want to have that formula memorized. A few questions about EOQ, economic ordering quantity. I also had a question that asked what happened to inventory if the EOQ went up. I think inventory would increase, but I don't know if I got that right or not. There are several questions on the 3 types of leverage (financial, operating, and total or complete), so it would be good to memorize these 3 formulas and know that DFL x DOL = DCL. I had to solve for the present value of a perpetuity (annual return divided by interest).I think I had to value a bond. To do so, use the cash flow for each period multiplied by the PVA (or find the PV's for each period and add them all together, as I had to do), then add the PV of the amount due at maturity and this is the Bond valuation.
Understand internal rate of return, and Net Present Value, which is not the same thing as Present Value as NPV takes into consideration the initial cash investment. On the test, they use the terms asset utilization and debt utilization, so I would look online to get those in your brain. Know that leverage refers to debt. Liquidity looks at current obligations and Leverage looks at long term obligations. 4 ratio types to be liquidity, activity, leverage, and profitability
I did have a question where it asked for the collection period to be calculated.
I was also given a currency conversion (from what it would look like in a newspaper I think) and needed to look at it and answer 2 questions about it.
The top line said something line $USD to German DM and then had some numbers after it.
Also, I was given a “stock's market price of 7-7.5” and you had to tell which was the ask and the bid?
Know what EBIT is, and Net income, (that net income is after taxes, but before any dividends are paid out).
Know the 3 sections of a cash flow stmt, (operating, investing, financing) and know that non-cash "expenses" like depreciation, are ADDED back into your net income on a cash flow, so it an increase to cash, and there at least one question about this. A cash flow statement begins with Net Income.

There were a good number of questions on cost of capital and on capital budgeting.
You will have to calculate break-even, which is Quantity (or break even quantity) = FIXED COST divided by (PRICE less VARIABLE COST). You will want this memorized to answer a few questions on it.
Know what earnings per share is, and what price per earnings ratio is. Other things I know I had questions on was Return on assets, return on equity.
Regarding bonds, know what a call option is, a put option, know that a debenture is an unsecured bond, and that the indenture is the bond contract.
Know that issuing common stock is most expensive way for a firm to raise capital. Know what flotation costs (legal, etc.) are.
Know what systematic risk and unsystematic risk is. Diversified risk is unsystematic risk. You can almost eliminate unsystematic risk by diversification, but you can't eliminate systematic risk.
Total risk is made up of diversifiable risk and non-diversifiable risk. Know about bonds being sold at a premium or a discount to their par value, how to calculate their yield. Know what a call is. Call price less par value = call premium.
Know that current or short term means less than one year.
Know that preferred stock gets paid a dividend, normally.
Know that a bond sold at a discount increases it's yield, and that a bond sold at a premium reduces it's yield. Know that the par value is the value at maturity. Know how to find the yield of a preferred stock. It is the annual dividend divided by the required rate of return. I am certain I had this on the test.
Know how to find the yield on common stock. Year 1 dividend divided by (investors required rate of return less the growth rate of dividends).
Know what a revolving line of credit and a commitment fee is, know that interest is paid in advance on a discount loan, which increases the interest rate as the usable funds are lower since interest was taken right off the top. Know what commercial paper is. Know what a lien is. Know what factoring is. I had questions on these.
Capital expenditures.
Know the difference between independent projects and mutually exclusive projects.
Know about those capital budgeting techniques from InstantCert and that if IRR is greater than the cost of capital, they should accept the project. Know that NPV and IRR can conflict with each other.
Know that "payback period" does not factor in time value of money.
I had one question about the “times interest earned formula”?
 Make sure you know all the risk concepts inside and out, since they tie into almost everything else.
There wasn't much on CAPM, maybe 3 or 4 questions, but they did require knowing the formula and how to use it.
• Calculation of IRR from given values
• Calculation of CAPM from given values
• Cost of retained earnings
• Calculation of current ratio
• Calculation of quick ratio
• Calculation of NPV
• Constant Growth Value is also known as what?
• Questions on WCCA
• Questions on Interest Rates
• WACC
• If a person can spend 5000 annually on a car within 4 years and the interest rate is 6%, what is the price of a vehicle that the person can afford (calculate present value and sum it)
• A question on opportunity cost
• Diversification
• If the rate of inflation is 6 % in USA and 2 % in Australia how will this affect USA $ vs. Aus $
• When is ordinary annuity paid (some choices are in the middle of the month, end of month etc)
• How often do banks pay interest on savings (some choices are monthly, annually, sami-annually etc.)

Comparing average tax rate to the marginal tax rate?

Banks pay interest? (answers: daily, weekly, quarterly, semi-annually)

Pure discount bonds sell at ? Below value, above value, etc. I never came across the term "pure discount".

How many years to double your money at XX% interest? This is actually easy to figure out using TVM on calculator. Just plug in any value - say $100 for PV, then FV of $200, Interest=XX. Then compute N (time period).

I had the question listed in the forum feedback about the car payment ($5000 for 4 years how much could the family afford to buy)

A question about how to calculate beta from some values presented?
I did have 2 or 3 questions using CAPM formula

Pure discount bonds sell at ? Below value, above value, etc. I never came across the term "pure discount".
Cost of retained earnings -- not just what it is, but how to calculate it from given values, the values given assume you know how other financial factors affect retained earnings
·         Effect of inflation on risk under the CAPM
·         Effects of differing levels of risk aversion on securities risk rating; calculate beta from given values
·         Yield to maturity on bond given values -- I could not remember how to work the function on my calculator
·         Several PV, NPV and one IRR calculation question
·         The 'family finances car' PV question
·         Calculating retained earnings from an income statement
·         Remember the accounting equation
·         Current ratio, practically the same question 3 times
·         Know the implications of/effects on SML (which is CAPM)
·         Which activities increase cash?
·         No inventory calculations, but know that inventory is least liquid current asset
·         If a business has a lot of assets in slow-moving inventory, which measure is the best indicator of their situation?
·         One where cost of equity /cost of capital is supposed to be a guide to return on assets. There's a relationship here I'm clueless about.
·         Which measure is best to determine return on assets (ROA is not one of the choices)?
·         Pick which of the following is characteristic of common stock
·         Know the definition of net present value, as well as how to figure it.
·         Beta on portfolio given betas of stocks in it
·         How would a firm minimize exchange rate risk?
·         What is a spot rate trade? None of the given answers made sense. I chose the one that looked like a typo of a sensible answer
·         No questions on Dupont directly, but one that looked like it may have assumed knowledge of it.
·         Calculate EPS (a 'what to leave out' question)
·         As mentioned in previous feedback several stock questions are used to test your knowledge of related topics; this makes stocks seem over-represented on the test.
·         Quick Ratio, Current Assets - Inventory / Current Liabilities.
Pure Discount Bond
-Beta concepts and how to calculate it
-A lot of characteristic questions over stocks and bonds(really know these)
-Value of Bonds
-Capital Budgeting; Payback period
-Effective Annual Rate
These included DOL, EPS, PV of bond, PV perpetuity, PI ratio, Gordon model, CAPM, current ratio, quick ratio.
The DSST Fact Sheet is pretty straightforward. Make sure you tackle each topic.
- There were a surprising number of questions on Floatation Costs on my exam.
- Several questions that involved PV/FV/CF calculations
- Capital Budgeting/IRR
- Cost of Capital/Cost of Debt/Cost of Equity
- Balance Sheet/Income Statement/Cash Flow Statement
- Ratio Analysis - what does it mean, how is it applied
- Annuities and Annuities Due - know the difference and application
- Short term and long term sources of funds and implications of each
- Bonds - evaluation, calculating value, return
- Sensitivity - what it measures, how it is applied
- Risk and Return - figuring expected return and how things affect risk
- Effective/Nominal interest rates
- Standard Deviation
- CAPM
- SML
- Diversification - questions specific to diversifying/risk
- Exchange rates/Intl financial markets/Spot vs Forward
 I needed was present value, future value, current ratio, quick ratio, nwc, price over sales (don't even know what that is), how to value a bond, theoretical knowledge of what capm is and what it is used for (not the formula), currency conversion question, interest rate conversion (nominal to effective).
NPV, IRR, MIRR, Payback, and PI.
 Current, Quick, EPS ratios seemed to pop up often.
I had 3 calculations on the Current Ratio (which is good cause it's an easy formula) and 1 using the Quick Ratio.

Comparing average tax rate to the marginal tax rate?

Banks pay interest on savings accounts? (answers: daily, weekly, quarterly, semi-annually)

Pure discount bonds sell at ? Below value, above value, etc. I never came across the term "pure discount".

How many years to double your money at XX% interest? This is actually easy to figure out using TVM on calculator. Just plug in any value - say $100 for PV, then FV of $200, Interest=XX. Then compute N (time period).

I had the question listed in the forum feedback about the car payment ($5000 for 4 years how much could the family afford to buy)

A question about how to calculate beta from some values presented? Again, I knew about beta but never came across how to calculate it. I guessed.

Know the implications of/effects on SML (which is CAPM)
·    Which activities increase cash?
·    No inventory calculations, but know that inventory is least liquid current asset
·    If a business has a lot of assets in slow-moving inventory, which measure is the best indicator of their situation?
·    One where cost of equity /cost of capital is supposed to be a guide to return on assets. There's a relationship here I'm clueless about.
·    Which measure is best to determine return on assets (ROA is not one of the choices)?
·    Pick which of the following is characteristic of common stock
·    Know the definition of net present value, as well as how to figure it.

1 comment:

  1. Good Information I might actually need this for class lol

    ReplyDelete