Questions and responses are added here as they become "frequently asked." Check back for additional material.

Time Value of Money
Geometric Expansions
Q: What is the Geometric Expansion for?
A: To simplify long repetitive geometric (terms with compound growth or discounting) series to simple equations that can be computed quickly.

Q: Why do we have to know them?
A: Because long repetitive series occur all the time in finance in an infinite number of ways.  No book, or combination of books can list all formulas to accommodate all situations where they occur. So it is important to be able to make your own formulas as you need them.

Q: What's the general idea behind the expansions?
A: To multiply or divide the series by some factor that will cause many of the terms in the new equation to be the same as many of the terms in the old equation. When you subtract one equation from the other, the identical terms will cancel out and the equation that you are working with will be much simpler to work with.

Q: How do know what to multiply the first equation by?
A: There are usually a lot of choices that will work. First, the objective is to produce a second equation with a lot of the same terms that are in the first. What I sometimes do is determine what I would need to multiply (or divide) the first term in the equation by in order to get the second term. Usually, the same multiplication function will cause the second term to equal the third term, and so on. In any case, as long as the second equation has terms that are identical to those in the first equation, they will be eliminated in the subtraction part of the geometric expansion.

Q: Does it matter whether you subtract the first equation from the second or the second from the first?
A: No. I sometimes perform the subtraction so as to obtain a positive result.

Growth Models
Q: Why is the dividend amount in any year t equal to DIV(1+g)^(t-1)? Why only t-1 years of growth for any year t?
A: The dividend in year 1 is DIV1. The dividend in year 2 is DIV1(1+g). The dividend in year 3 is DIV1(1+g)^2.  The dividend in year 4 is DIV1(1+g)^3. The dividend in any year is DIV1(1+g)^(t-1).

Q: What if the company never pays a dividend?
A: Then use an earnings model. That is, substitute EPS for dividends in the growth model.

Return Measurement
IRR
Q: Isn't there an easier way to get the internal rate of return?
A: Generally, no. You have to substitute. There are some special cases where you can solve algebraicly for r, but this doesn't happen in most realistic scenarios.

Q: Then how does my calculator get r so fast?
A: Actually, you may notice that your calculator usually takes longer to calculate IRR than most anything else. It substitutes for r just as you do, though somewhat more efficiently. Unfortunately, your calculator may not be able to easily solve for IRR in all situations.

Exams
Q: Are the sample exams comparable to actual exams?
A: In my opinion, the on-line sample exams are reasonable indicators of actual exam questions. First, each of the sample questions were drawn from actual exams that I used in my class in previous years. I don't make my exams harder every semester. It is my intent that actual exams be roughly comparable in rigor; sometimes a little easier, sometimes a little harder. But on the other hand, students often tell me that the actual exams are much harder. Even in the past when I have reversed sample and actual exams and they still tell me that the actual exams are harder. This makes me believe that my students will always believe that sample exams are easier. What I think really happens a lot is that students take the sample exams under "non-exam settings," in particular, glance at solutions before or while working through questions, and find them to be quite easy. A single glance at a question solution does make any exam question a whole lot easier. But, this opportunity is not available under actual exam settings. If either of the two sample exams takes much less than two hours to work through correctly, either you are really prepared or you probably didn't take the sample exam under exam conditions.

Snappy Answers to Silly Questions
 
Q: Will this be on the exam?
A: I don't know. I haven't written it yet.

Q: What should we know for the exam?
A: Everything

Q: Do we have to answer all the questions on the exam?
A: Of course not. Answer as many as you like.

Q: Sorry I didn't make class last week. Did I miss anything?
A: No

Q: How come you took off more points from my exam than you did on his? We made the same mistakes.
A: Sorry. Have him bring his exam back to me so I can fix it.

Q: Will the final be the same as the mid-term?
A: No. The final will have different questions.

Q: Can I turn in the project late?
A: Turn it in whenever you like.

Q: Can I re-take the exam?
A: Sure. Next semester.
 
 

Finance 0003: Introduction to Financial Management

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