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# DSST Principles of Finance Study Guide

Updated: Aug 18

Want to know everything there is to know about the DSST Principles of Finance Exam?

Our Principles of Finance study guide is here to help you prepare.

Our guide covers all the critical topics for the exam so that you can be confident in your preparation.

**Table of Contents**

## 1. Financial Statements and Planning

**Fundamentals of Financial Statements (e.g., balance sheet, income statement, statement of cash flows, statement of owner equity): **

Students should understand the purpose and content of each type of financial statement. In addition, students should be able to prepare simple financial statements from scratch.

**Ratio Analysis (e.g., liquidity, solvency, market prospect, profitability, DuPont):**

Students should be familiar with various ratios used to analyze financial statements and the DuPont system of financial analysis.

**Taxes (e.g., average versus marginal tax rates, corporate tax rates): **

Students should understand taxation basics, including the difference between marginal and average tax rates and how these rates apply to businesses.

### DSST Principles of Finance Trivia Question #436

## 2. Time Value of Money

**Present Value (lump sum and annuity):**

Students should be able to calculate the present value of lump sum and annuity payments.

**Future Value (lump sum and annuity):**

Students should be able to calculate the future value of lump sum and annuity payments.

**Annuity Due Versus Ordinary Annuity:**

Students should understand the difference between an annuity due and an ordinary annuity and how this affects present and future value calculations.

**Interest Rate Calculations:**

Equivalent Annual Rate (EAR) and Annualized Percentage Rate (APR).

Students should be able to calculate EAR and APR and understand how these rates are used in financial planning.

## 3. Working Capital Management

**Short-Term Sources of Funds:**

Students should be familiar with the various sources of short-term financing, including lines of credit, trade credit, and commercial paper.

**Management of Short-Term Assets and Liabilities (e.g., inventory, account receivables, accounts payable, short-term investments): **

Students should understand the concept of working capital and how it is managed.

This includes knowing how to calculate and interpret key ratios such as the inventory turnover ratio and the accounts receivable turnover ratio.

**Cash Budget: **

Students should be able to prepare a cash budget and understand how it is used in financial planning.

## 4. Valuation and Characteristics of Stocks and Bonds

**Bonds (e.g., debenture, sinking funds, coupon):**

Students should understand the various types of bonds and how they are traded. In addition, students should be familiar with bond valuation concepts such as the present value of a bond and the yield to maturity.

**Common Stock and Preferred Stock (i.e., dividend): **

Students should understand the difference between common and preferred stock, the concept of dividends, and how they are paid.

## 5. Capital Budgeting

**Capital Asset (e.g., building and equipment):**

Students should know businesses' capital assets, such as buildings and machinery. In addition, students should be familiar with the concept of depreciation and how it affects financial statements.

**Project Cash Flow Forecasting and Analysis (e.g., incremental, total, pro format):**

Students should be able to forecast cash flows for capital budgeting purposes using incremental and total methods. In addition, students should be familiar with pro forma financial statements and how they are used in capital budgeting decisions.

**Financial Analysis Tools (e.g., Present Net Value, payback, Accounting Rate of Return (ARR), Internal Rate of Return (IRR)):**

Students should be familiar with the various financial analysis tools used in capital budgeting, such as NPV, payback, and IRR. In addition, students should understand how to interpret the results of these analyses.

**Break-Even and Sensitivity Analysis: **

Students should know break-even analysis and its use in capital budgeting decisions. In addition, students should understand sensitivity analysis and how it can be used to assess the risk of a capital investment project.

### DSST Principles of Finance Trivia Question #715

## 6. Cost of Capital

**Cost of Debt: **

Students should be familiar with the cost and its calculation. In addition, students should understand how the cost of debt affects a firm's capital structure.

**Cost of Equity (e.g., common and preferred stock):**

Students should be familiar with the cost of equity and how it is calculated. In addition, students should understand how the cost of equity affects a firm's capital structure.

**The Weighted Average Cost of Capital:**

Students should know the weighted average cost of capital (WACC) and how it is calculated. In addition, students should understand how the WACC is used in capital budgeting decisions.

## 7. Risk and Return

**Expected Return on an Asset and a Portfolio:**

Students should be familiar with the concept of expected return and how it is calculated. In addition, students should understand how the expected return is used in portfolio construction.

**Measures of Risk (e.g., standard deviation, beta): **

Students should be familiar with risk and how it is measured. In addition, students should understand how risk is used in portfolio construction.

**Determinants of Interest Rates (e.g., real and nominal):**

Students should be familiar with the factors that affect interest rates. In addition, students should understand how changes in interest rates can impact a firm's cost of capital.

**Capital Asset Pricing Model (CAPM) and Security Market Line (SML) (e.g., beta and risk premium):**

Students should be familiar with the concept of the CAPM and how it is used to determine the cost of equity capital.

In addition, students should understand the relationship between beta and the expected return on investment.

**Diversification (e.g., market risk, company-specific risk, portfolio risk): **

Students should be familiar with diversification and how it is used to manage risk.

In addition, students should understand the different types of risks that can impact a portfolio (e.g., market risk, company-specific risk, etc.).

## 8. International Financial Management

**Impact of Exchange Rates on International Financial Markets:**

Students should know how exchange rates can impact international financial markets.

In addition, students should understand the different types of risks associated with currency fluctuations.

**Currency Risk and Political Risk:**

Students should be familiar with currency risk and how it can affect a firm's operations.

In addition, students should understand the concept of political risk and how it can impact a firm's operations in foreign countries.

**Tools (e.g., Spot vs. forwarding, hedging): **

Students should be familiar with the concept of currency hedging and how it is used to mitigate currency risk.

In addition, students should understand the different types of hedging instruments that are available to investors.

## 9. Conclusion: DSST Principles of Finance

In conclusion, the DSST Principles of Finance Exam covers various finance-related topics.

The exam tests a student's knowledge of financial concepts and their ability to apply those concepts in real-world scenarios.

The exam is also challenging, so students should be thoroughly prepared.

Are you ready for more?

Try a free practice test and prepare to ace your DSST Principles of Finance exam.

Best of luck and happy testing!

## 10. Student Resources

## 11. References

DSST Principles of Finance Fact Sheet