Students who have successfully passed the Accelerated Corporate Finance qualifying exam may take the Finance 1 waiver exam if they want to waiver Finance 1 and proceed directly to advanced finance classes. The waiver exam is a 2 hour written exam which will be given on campus. The exam is open note and open book. You may use a laptop and Excel. Although you can use outside resources, do not expect to have time to find resources during the exam. You should have reviewed material prior to starting the qualifying exam. You are not allowed to discuss the exam contents with others during or after the exam. The Kellogg Honor Code applies. In particular, the exam must be solely your own work.
Finance 1 is a graduate level finance class. Thus, students who have not studied finance at the graduate level have had a low probability of passing the Finance 1 waiver exam. Prior work experience or studying finance at the undergraduate level is typically insufficient preparation for passing the waiver exam for this graduate level class.
To pass the Finance 1 waiver exam you should understand and be able to explain the following concepts:
- Capital Asset Pricing Model (CAPM). You should understand both the statistical as well and the intuitive basis of CAPM. You should understand the difference between systematic risk (beta) and idiosyncratic risk and why it is relevant for calculating discount rates and for performance evaluation.
- Betas. You should understand how asset, debt, and equity betas and returns are related and how to lever and unlever betas.
- Bond Pricing. You should understand how to price bonds given cash flows and discount rates. You should understand the relationship between the coupon rate on a bond, the yield on a bond (the promise rate on a bond), and the expected return on the bond.
- Discounted Cash Flow. You should be able to value a project or value an asset using discounted cash flow. This could be applied to valuing a firm's assets, debt, or equity.
- Forecasting Cash Flows. You should understand how to calculate the cash flow from assets (CFA) which are used to value a project as well as how to calculate cash flow to debt (CFD) and cash flow to equity (CFE). You should understand the intuition of how cash flow from assets is forecasted for the purpose of valuation. Cash flow from assets is sometimes called unlevered cash flow and cash flow to equity is sometimes called levered cash flow to equity.
- Terminal Values. You should understand what a terminal value is, how it is estimated, and how it is incorporated in a valuation.
- Multiples. You should understand how firms are valued using a multiples approach. You should understand how the different valuation ratios are related and what assumptions one must make to justify the use of different valuation ratios. You should know how multiples are used to calculate the terminal value in a going-concern firm valuation.
- Financial Options. You should understand call and put options (the definition and mechanics). You should be able to draw the payoff diagram for an option or portfolio of options. You should be able to construct a portfolio of options given a payoff diagram of the portfolio. You will NOT be asked how to price options.
If you have any questions about this web page, you may e-mail Professor Petersen