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Question 1(a). There are many practical ways to look at business, including the views listed below. OrganizationChartViewTheoryofQuantumSquaredReturnsCashInflowView.ExcessCapitalView.AccountingvsFinanceViewMBAProgramViewLifeCycleViewPPrivatePersonalInformationViewLifeCyclev.GrowthCompanyViewSubjectiveViewofRiskGrowthCompanyInvestmentViewHighStakesCapitalView.AcidClassView.FinancialInstrumentView.StakeholdervsShareholderView Each of these views is relatively specific with respect to different parts of business, including some finance specific parts. (This question part is worth 0.5 points.) Answer 1(a): True or False: Question 1(b). Diagram 1 below can be seen as a first principles way of looking at business. (This question part is worth 0.5 points.) Diagram 1 Answer 1(b): True or False: Question 2. Diagram 1 above can be seen as a first principles way of looking at business because all businesses need to (i) create products/services, (ii) sell the products/services they create, and (iii) finance the ability to create and sell products/services and to grow the business, which, in its enabling role, can be reasonably said to put finance at the center of business. (This question is worth 1 point.) Answer 2: True or False: Question 3(a). Free Cash Flow is an important finance framework because, properly used, the framework can guide for-profit companies through the "process" of getting "free cash" from non-traditional sources such as governmental and philanthropic organizations in order for companies to increase their profits, assuming the shareholder supremacy corporate objective, rather than the stakeholder view of corporate objectives. (This question part is worth 0.5 points.) Answer 3(a): True or False: Question 3(b). Free Cash Flow is another substitute term for Profitability just like the finance term Earnings and the accounting term Net Income. (This question part is worth 0.5 points.) Answer 3(b): True or False: [The remainder of this page intentionally left blank] Question 6(a). If you needed $10,000 in your savings account three (3) years from now and the interest rate is 4% per year, compounded quarterly, you would deposit $9,400.40 today. (This question part is worth 0.5 points.) Answer 6(a): True or False: Question 6(b). If you had $8,874.49 in your savings account today, three (3) years from now with the interest rate at 4% per year, compounded quarterly, you would have $10,000 in your savings account. (This question part is worth 0.5 points.) Answer 6(b): True or False: [The remainder of this page intentionally left blank] Question 8. Which statement below does not apply to Equation 2 below? (This question is worth 2 points.) Equation 2 a) Net operating profit after taxes, net operating working capital and total net operating capital are needed to determine the numerator. b) Investors are very interested in the numerator. c) Equation 1 above and this Equation 2 seek to quantify the value of a cash flow generating asset. d) Increasing revenue may not increase the quotient of this equation. e) Borrowing more money may not increase the quotient of this equation. f) Ceteris paribus, if the market price of the stock for this company is lower than the value determined by this Equation 2 then you should consider buying this stock. g) None of the above. Question 11. In your own words, quantitatively and qualitatively describe the quotient (Asset Value), numerator (Net Cash Flow), and denominator (Rate) for the Equation 3 below. Your answer should tell an easy-to-follow story, with a beginning, middle, and end that will enable the instructor to conclude, without reservation, you understand the question as well as understanding the answer. (This question is worth 3 points.) Equation 3 Question 12: In your own words, analyze the following Equation 4 by describing (i) each individual part of the equation, (ii) the mathematical relationship among the parts, (iii) the purpose of the equation, and (iv) the relationship between this equation and Equation 3 in Question 11. (This question is worth 3 points.) Equation 4 Note: Use the following to understand the denominator. +(%ofDebt)(CostofDebt,aftertax)+(%ofCommon)(CostofCommon)+(%ofPreferred)(CostofPreferred)=WeightedAverageCostofCapital [The remainder of this page intentionally left blank] Questions 13: In your own words, use the framework below to answer the following question within the context of this course. Given Given Given Given Calc Given Calc Given Given Given Calc Given Calc Given Calc Calc Calc From a Period n1 to Period n financial performance perspective we see the following results. - Positive 55.88% change in total current liabilities - Positive 53.70% change in total liabilities . Negative 109.52% change in retained earnings . Negative 21.31% change in total common equity Instructor Question Specific Comment: On the surface, these results begin to tell us who paid for what was done either the company from operations, lenders via debt, or common shareholders from their equity investments in the company. One indication that the shareholders bore most of the payment burden can be seen by the significant decrease in negative $200 in retained earnings. This is the amount that liabilities in Period n, exceeded Period n assets. Whenever assets cannot cover liabilities, shareholders make up the difference. This difference can be seen as a decrease in retained earnings from the prior period. It can also be seen when retained earnings are negative and the company raised additional capital, i.e., $1,000, from shareholders to cover difference. [The remainder of this page intentionally left blank] Questions 13 (Continued): Given the balance sheet above, given the changes in the balance sheet from Period n-1 to Period, and given the surface explanation in the paragraph above, using abductive reasoning (see below), expand on the surface explanation by giving a more detailed explanation of the Period n1 to Period n financial performance results. (This question is worth 5 points.) Abduction Abductive reasoning is based on creating and testing hypotheses using the best information available at the time. Abductive reasoning is used in a person's daily decision making because it works with whatever information is present - as even if it is incomplete information. This type of reasoning involves making educated guesses about the unknowable from observed phenomena. Examples of abductive reasoning include a doctor making a diagnosis based on test results and a jury using evidence to pass judgment on a case: in both scenarios, there is not a 100% guarantee of correctness - just the best guess based on the available evidence. [The remainder of this page intentionally left blank] Question 14: Use the free cash flow framework below for this auestion in vour own words. Calc Calc Calc Given Given Given Calc Given Given Calc Calc Calc Calc Calc Given Calc Calc Calc Calc Question 14(i.,. Question 14(b): What does this specific company free cash flow tell us about the company? (This question is worth 3 points.) Question 7. Which statement below does not apply to Equation 1 below? (This question is worth 2 points.) Equation 1 AssetValue=t=1n(1+RateiNetCashFlowi a) Fundamentally, the equation is a division problem to the extent the quotient is equal to the numerator divided by the denominator. b) To increase the quotient in the equation, companies should focus on increasing the numerator, decreasing the denominator, or both. c) The denominator represents what it costs the company to generate the numerator. d) Ceteris paribus, we can look at the numerator as a function of accounting and financial projections and the denominator as a function of statistics and probability. e) The equation is universal because it can be used as the foundation to calculate the value of cash flow generating assets including the company, the company's equity, and the company's debt. f) The equation can also be used to determine whether building a new factory in a new geographic market makes sense financially, subject, of course, to the assumptions. g) Ceteris paribus, the CEO of an operating company which regularly needs to issue short term notes, and which sometimes needs to issue longer term bonds would be happy when the Federal Reserve cuts interest through exercising monetary policy because the value of the company would likely increase. h) Ceteris paribus, for any period, operating companies prefer lower interest rates, higher net operating working capital and higher net operating profit after taxes. i) In a similar way to why we can say finance is at the center of business, we can say this equation is at the center of finance. j) None of the above. k) All of the above. 1) Only a, b, and i above. m) Only g and habove. Answer 7: Question 8. Which statement below does not apply to Equation 2 below? (This question is worth 2 points.) Equation2t=1n(1+WeightedAverageCostofCapital)iFreeCashFlowi a) Net operating profit after taxes, net operating working capital and total net operating capital are needed to determine the numerator. b) Investors are very interested in the numerator. c) Equation 1 above and this Equation 2 seek to quantify the value of a cash flow generating asset. d) Increasing revenue may not increase the quotient of this equation. e) Borrowing more money may not increase the quotient of this equation. f) Ceteris paribus, if the market price of the stock for this company is lower than the value determined by this Equation 2 then you should consider buying this stock. g) None of the above. Question 9. Which statement below applies to the nature of the time value of money? (This question is worth 2 points.) a) Financially, a dollar tomorrow is worth less than a dollar today. b) Generally, people prefer present consumption to future consumption. c) Monetary inflation could further discount the present value of future cash flows. d) Uncertainties associated with the future cash flows could further discount the present value of future cash flows. e) All of the above. f) None of the above. g) Only statements a \& b. h) Only statements a, b, \&, d. Question 9: Question 10. Which statement below applies to free cash flow (FCF)? (This question is worth 2 points.) a) FCF is money given to a company for free. b) FCF is to liquidity as net income is to profit. c) FCF is the difference between Net Operating Profit After Taxes and Net Investment in Operating Capital. d) After paying all costs related to "operations" FCF is available to distribute to investors (equity \& debt). e) All of the above. f) None of the above. g) Only statements a \& c. h) Only statements b, c, \&, d. i) Only statements c \& d. Question 1(a). There are many practical ways to look at business, including the views listed below. OrganizationChartViewTheoryofQuantumSquaredReturnsCashInflowView.ExcessCapitalView.AccountingvsFinanceViewMBAProgramViewLifeCycleViewPPrivatePersonalInformationViewLifeCyclev.GrowthCompanyViewSubjectiveViewofRiskGrowthCompanyInvestmentViewHighStakesCapitalView.AcidClassView.FinancialInstrumentView.StakeholdervsShareholderView Each of these views is relatively specific with respect to different parts of business, including some finance specific parts. (This question part is worth 0.5 points.) Answer 1(a): True or False: Question 1(b). Diagram 1 below can be seen as a first principles way of looking at business. (This question part is worth 0.5 points.) Diagram 1 Answer 1(b): True or False: Question 2. Diagram 1 above can be seen as a first principles way of looking at business because all businesses need to (i) create products/services, (ii) sell the products/services they create, and (iii) finance the ability to create and sell products/services and to grow the business, which, in its enabling role, can be reasonably said to put finance at the center of business. (This question is worth 1 point.) Answer 2: True or False: Question 3(a). Free Cash Flow is an important finance framework because, properly used, the framework can guide for-profit companies through the "process" of getting "free cash" from non-traditional sources such as governmental and philanthropic organizations in order for companies to increase their profits, assuming the shareholder supremacy corporate objective, rather than the stakeholder view of corporate objectives. (This question part is worth 0.5 points.) Answer 3(a): True or False: Question 3(b). Free Cash Flow is another substitute term for Profitability just like the finance term Earnings and the accounting term Net Income. (This question part is worth 0.5 points.) Answer 3(b): True or False: [The remainder of this page intentionally left blank] Question 6(a). If you needed $10,000 in your savings account three (3) years from now and the interest rate is 4% per year, compounded quarterly, you would deposit $9,400.40 today. (This question part is worth 0.5 points.) Answer 6(a): True or False: Question 6(b). If you had $8,874.49 in your savings account today, three (3) years from now with the interest rate at 4% per year, compounded quarterly, you would have $10,000 in your savings account. (This question part is worth 0.5 points.) Answer 6(b): True or False: [The remainder of this page intentionally left blank] Question 8. Which statement below does not apply to Equation 2 below? (This question is worth 2 points.) Equation 2 a) Net operating profit after taxes, net operating working capital and total net operating capital are needed to determine the numerator. b) Investors are very interested in the numerator. c) Equation 1 above and this Equation 2 seek to quantify the value of a cash flow generating asset. d) Increasing revenue may not increase the quotient of this equation. e) Borrowing more money may not increase the quotient of this equation. f) Ceteris paribus, if the market price of the stock for this company is lower than the value determined by this Equation 2 then you should consider buying this stock. g) None of the above. Question 11. In your own words, quantitatively and qualitatively describe the quotient (Asset Value), numerator (Net Cash Flow), and denominator (Rate) for the Equation 3 below. Your answer should tell an easy-to-follow story, with a beginning, middle, and end that will enable the instructor to conclude, without reservation, you understand the question as well as understanding the answer. (This question is worth 3 points.) Equation 3 Question 12: In your own words, analyze the following Equation 4 by describing (i) each individual part of the equation, (ii) the mathematical relationship among the parts, (iii) the purpose of the equation, and (iv) the relationship between this equation and Equation 3 in Question 11. (This question is worth 3 points.) Equation 4 Note: Use the following to understand the denominator. +(%ofDebt)(CostofDebt,aftertax)+(%ofCommon)(CostofCommon)+(%ofPreferred)(CostofPreferred)=WeightedAverageCostofCapital [The remainder of this page intentionally left blank] Questions 13: In your own words, use the framework below to answer the following question within the context of this course. Given Given Given Given Calc Given Calc Given Given Given Calc Given Calc Given Calc Calc Calc From a Period n1 to Period n financial performance perspective we see the following results. - Positive 55.88% change in total current liabilities - Positive 53.70% change in total liabilities . Negative 109.52% change in retained earnings . Negative 21.31% change in total common equity Instructor Question Specific Comment: On the surface, these results begin to tell us who paid for what was done either the company from operations, lenders via debt, or common shareholders from their equity investments in the company. One indication that the shareholders bore most of the payment burden can be seen by the significant decrease in negative $200 in retained earnings. This is the amount that liabilities in Period n, exceeded Period n assets. Whenever assets cannot cover liabilities, shareholders make up the difference. This difference can be seen as a decrease in retained earnings from the prior period. It can also be seen when retained earnings are negative and the company raised additional capital, i.e., $1,000, from shareholders to cover difference. [The remainder of this page intentionally left blank] Questions 13 (Continued): Given the balance sheet above, given the changes in the balance sheet from Period n-1 to Period, and given the surface explanation in the paragraph above, using abductive reasoning (see below), expand on the surface explanation by giving a more detailed explanation of the Period n1 to Period n financial performance results. (This question is worth 5 points.) Abduction Abductive reasoning is based on creating and testing hypotheses using the best information available at the time. Abductive reasoning is used in a person's daily decision making because it works with whatever information is present - as even if it is incomplete information. This type of reasoning involves making educated guesses about the unknowable from observed phenomena. Examples of abductive reasoning include a doctor making a diagnosis based on test results and a jury using evidence to pass judgment on a case: in both scenarios, there is not a 100% guarantee of correctness - just the best guess based on the available evidence. [The remainder of this page intentionally left blank] Question 14: Use the free cash flow framework below for this auestion in vour own words. Calc Calc Calc Given Given Given Calc Given Given Calc Calc Calc Calc Calc Given Calc Calc Calc Calc Question 14(i.,. Question 14(b): What does this specific company free cash flow tell us about the company? (This question is worth 3 points.) Question 7. Which statement below does not apply to Equation 1 below? (This question is worth 2 points.) Equation 1 AssetValue=t=1n(1+RateiNetCashFlowi a) Fundamentally, the equation is a division problem to the extent the quotient is equal to the numerator divided by the denominator. b) To increase the quotient in the equation, companies should focus on increasing the numerator, decreasing the denominator, or both. c) The denominator represents what it costs the company to generate the numerator. d) Ceteris paribus, we can look at the numerator as a function of accounting and financial projections and the denominator as a function of statistics and probability. e) The equation is universal because it can be used as the foundation to calculate the value of cash flow generating assets including the company, the company's equity, and the company's debt. f) The equation can also be used to determine whether building a new factory in a new geographic market makes sense financially, subject, of course, to the assumptions. g) Ceteris paribus, the CEO of an operating company which regularly needs to issue short term notes, and which sometimes needs to issue longer term bonds would be happy when the Federal Reserve cuts interest through exercising monetary policy because the value of the company would likely increase. h) Ceteris paribus, for any period, operating companies prefer lower interest rates, higher net operating working capital and higher net operating profit after taxes. i) In a similar way to why we can say finance is at the center of business, we can say this equation is at the center of finance. j) None of the above. k) All of the above. 1) Only a, b, and i above. m) Only g and habove. Answer 7: Question 8. Which statement below does not apply to Equation 2 below? (This question is worth 2 points.) Equation2t=1n(1+WeightedAverageCostofCapital)iFreeCashFlowi a) Net operating profit after taxes, net operating working capital and total net operating capital are needed to determine the numerator. b) Investors are very interested in the numerator. c) Equation 1 above and this Equation 2 seek to quantify the value of a cash flow generating asset. d) Increasing revenue may not increase the quotient of this equation. e) Borrowing more money may not increase the quotient of this equation. f) Ceteris paribus, if the market price of the stock for this company is lower than the value determined by this Equation 2 then you should consider buying this stock. g) None of the above. Question 9. Which statement below applies to the nature of the time value of money? (This question is worth 2 points.) a) Financially, a dollar tomorrow is worth less than a dollar today. b) Generally, people prefer present consumption to future consumption. c) Monetary inflation could further discount the present value of future cash flows. d) Uncertainties associated with the future cash flows could further discount the present value of future cash flows. e) All of the above. f) None of the above. g) Only statements a \& b. h) Only statements a, b, \&, d. Question 9: Question 10. Which statement below applies to free cash flow (FCF)? (This question is worth 2 points.) a) FCF is money given to a company for free. b) FCF is to liquidity as net income is to profit. c) FCF is the difference between Net Operating Profit After Taxes and Net Investment in Operating Capital. d) After paying all costs related to "operations" FCF is available to distribute to investors (equity \& debt). e) All of the above. f) None of the above. g) Only statements a \& c. h) Only statements b, c, \&, d. i) Only statements c \& d

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