FINA 363
Finance Fundamentals
March 27, 2006
Instructor: Mr. Dale Manke Office Phone 865-2815 ext. 8123 Home Phone 725-5744
E-mail manked@evangel.edu
Course Description: Learners study principles and problems involved in the finance
function of the firm, including taxes, cash flow, capital management, budgets,
reorganization, and investments.
Course Objectives: At the completion of this course the student will:
Prior to and during session one
1.
Categorize key participants in financial transactions and the basic
activities of financial institutions.
2.
Identify different measures of performance that can be used to
evaluate a business firm.
3.
Appreciate that cash is the lifeblood of a business enterprise.
4.
Create cash budgets for the short-term.
Prior to and during session two
1.
Define the concept of time-value of money.
2.
Realize the meaning and fundamentals of risk and return.
3.
Apply the basic valuation model to all types of cash flows.
4.
Value the concept of market efficiency related to valuation.
Prior to and during session three
1.
Calculate, interpret, and evaluate capital budgeting techniques.
2.
Determine the short-term and long-term cost of capital.
3.
Differentiate between debt and equity capital.
Prior to and during session four
1.
Recognize the financial planning process, including the role and
interrelationship between long-term and short-term plans.
2.
Analyze credit terms offered by suppliers.
3.
Calculate effective interest rates.
4.
Evaluate the lease vs. purchase decision
Required Materials:
Text: Principles of Managerial Finance Gitman, Lawrence, J. Eleventh edition
2006, Pearson/Addison Wesley.
Calculator: Texas Instruments BA-II Plus
Grade Determination
Grades will be assigned according to the new scale found on page 38 in the 2004-2006
Evangel University Catalog.
Grades will be determined according to the following point distribution:
Point Value
Chapter problems and questions
280
Attendance/Participation
80 (20 per night must be present)
Course Exams
400
Total
760
Please use the grid provided to track your grade
Assignment
Chapter problems and questions
Participation
Course Exam
Chapter problems and questions
Participation
Course Exam
Chapter problems and questions
Participation
Course Exam
Chapter problems and questions
Participation
Course Exam
Total Points
Week
1
1
1
2
2
2
3
3
3
4
4
4
Points
Possible
60
20
100
80
20
100
60
20
100
80
20
100
760
Points
Earned
Assignments
The assignments for this module are designed to enable you to continue your
personal professional development. The practical nature of the Evangel University degree
completion program is designed for learners to apply text theory to real-life situations.
Accordingly, please be prepared to share examples with your colleagues during class
time.
All written homework should be presented in a professional manner. Always
include appropriate headings to your papers and include your name and school number.
While problem-solving work should be done on a spreadsheet program when possible,
hand-written work for problems will be accepted. Finish assignments for each chapter
separately for easier grading. You must show all of your work don’t just right down an
answer and expect to receive credit. Late homework will be graded for half credit.
In-class activities may be handwritten and informal. Please be prepared to discuss the
objectives contained in the assigned readings. You may call or e-mail me with any
questions you may have while completing the assignments. Homework will be collected
each week. There will be an exam each night over the chapters and what we discuss in
class.
Week 1 To be completed prior to and submitted on the first night of class.
Read Gitman, Chapter 1
THE ROLE AND ENVIRONMENT OF MANAGERIAL FINANCE
Demonstrate the discipline’s importance to students of all majors and the
usefulness of the topic to individuals in their roles as consumers, investors,
employees, and citizens.
Establish the goal of the corporation: shareholder wealth maximization.
Familiarize students with concepts that will recur throughout the text, including
fixed and residual claims, bonds and stocks, markets, agency problems, forms of
organizations and economic considerations.
Discuss the fundamentals of business taxation of ordinary income and capital
gains, and explain the treatment of tax losses.
Write Page 39-40 Problems 1-6, 1-8, 1-11. 20 points “SHOW ALL OF YOUR WORK”
Read Gitman, Chapter 2
FINANCIAL STATEMENTS AND ANALYSIS
Appreciate financial analysis more broadly than the mechanical evaluation of
standard financial ratios.
Evaluate the standard techniques of trend and common size analysis of financial
statements and demonstrate the importance of comparing ratios and stock returns
to benchmarks.
Discuss the relationship between debt and financial leverage and the ratios used to
analyze a firm’s debt.
Analyze a firm’s profitability and its market value using ratios.
Write Page 84 problem 2-3 & page 93 problem 2-20 (All the ratios from #20 will be on
the exam but I will provide formulas). 20 points “SHOW ALL OF YOUR
WORK”
Read Gitman, Chapter 3
CASH FLOW AND FINANCIAL PLANNING
Grasp the importance of cash flow.
Understand why net income is not an accurate measure of cash flow.
Identify several ways to estimate future cash flows.
Construct a pro forma income statement.
Explain the financial planning process, including long-term and short-term
financial plans.
Write Page 137 problem 3-3(tax rate 34%), & page 140 problem 3-10 on a spreadsheet.
20 points “SHOW ALL OF YOUR WORK”
Week 2 To be completed prior to and submitted on the second night of class.
Read Gitman, Chapter 4
TIME VALUE OF MONEY
Distinguish between simple and compound interest and have an appreciation for
the effect of compounding on either the present value or the future value of cash
flows.
Solve for the present value or the future value of A single cash flow using simple,
or compounded interest.
Solve for either the number of periods or the interest rate for a single cash flow
problem where all other variables are known.
Solve a multiple cash flow problem by continuously applying the single cash flow
technique.
Solve for annuities and perpetuities.
Understand and solve loan amortization problems as being an application of the
annuity problem.
Write Page 204-215 problems 1, 4, 7, 11, 16, 18a(1), 19a(1), 21a.b.c, 25b, 30, & 46 (a
loan amortization schedule is on page 194 table 4.8). 20 points
“SHOW ALL OF YOUR WORK”
Read Gitman, Chapter 5
RISK AND RETURN
Review the meaning and fundamentals of risk, return, and risk preferences.
Analyze the portfolio effect; the risk of diversified portfolios is reduced to market
risk only.
Discuss the measurement of return and standard deviation for a portfolio and the
various types of correlation
Identify the origin and application of beta.
Discuss the security market line and the capital asset pricing model and their
application to security pricing.
Write Page 264 Problem 5-10 using a spreadsheet & page 269 problem 5-22. 20 points.
“SHOW ALL OF YOUR WORK”
Read Gitman, Chapter 6
INTEREST RATES AND BOND VALUATION
Describe interest rate fundamentals, the term structure of interest rates, and risk
premiums.
Apply the basic valuation model to bonds and describe the impact of required
return and time to maturity on bond values.
Solve for the price of a bond.
Write Page 313-320 problems 6-3, 6-11, 6-16, 6-24, 6-25. 20 points “SHOW ALL OF
YOUR WORK”
Read Gitman, Chapter 7
STOCK VALUATION
Differentiate between debt and equity capital.
Discuss the concept of market efficiency and basic common stock valuation under
zero growth and constant growth.
Solve for the price of a share of preferred stock.
Solve for the price of a share of common stock whose dividends are judged to
grow at a constant rate.
Explain the relationships among financial decisions, return, risk, and the firm’s
value.
Write Page 361-362 problems 7-5, 7-7, 7-8, 7-9. 20 points “SHOW ALL OF YOUR
WORK”
Week 3 To be completed prior to and submitted on the third night of class.
Read Gitman, Chapter 9
CAPITAL BUDGETING TECHNIQUES
Introduce students to the basics of the corporate investment decision.
Recognize how markets create investment opportunities.
Calculate, interpret, and evaluate three capital budgeting techniques; payback
period, net present value and internal rate of return
Provide an opportunity to synthesize and reinforce much of the material covered
in previous chapters.
Write Page 438-442 problems 9-3, 9-5, 9-10, 9-12, 9-16a&c then page 440 problem 9-9
using a spreadsheet. 20 points “SHOW ALL OF YOUR WORK”
Read Gitman, Chapter 11
THE COST OF CAPITAL
Estimate the after-tax cost of debt, the cost of preferred stock, and the cost of
equity using two methods; the CAPM approach and the discounted cash flow
approach.
Adjust these estimates for the costs of raising capital from outside sources
Combine all previous objectives and calculate the WACC.
Explain the RADR and when it should be used rather than the WACC.
Write Page 526-530 problems 11-6, 11-9, 11-16. 20 points “SHOW ALL OF YOUR
WORK”
Read Gitman, Chapter 12
LEVERAGE AND CAPITAL STRUCTURE
Explain how the “magnifying” effect of debt’s use on both good and bad
operating results may increase the expected level of cash flows but also may
increase risk.
Realize that when corporations are taxed, debt acts as a tax shield and can
increase the firms’ value.
Recognize that debt forces the firm to pay out a part of its free cash flow, thereby
lowering potential agency costs and increasing the value of the firm.
Discuss the use of debt as a credible signal that the expected level of future cash
flows is high enough to meet fixed obligations.
Discover that the optimal capital structure is a trade-off that balances the benefits
of leverage against the likelihood and size of potential bankruptcy costs
Write Page 576 problem 12-5 & page 583 problem 12-23 using a spreadsheet. 20 points
“SHOW ALL OF YOUR WORK”
Week 4 To be completed prior to and submitted on the fourth night of class.
Read Gitman, Chapter 13
DIVIDEND POLICY
Realize that divided policy impacts stockholders’ wealth.
Discover that the board of directors of a company is responsible for synthesizing
residual dividend policy, the implications of signaling, investor expectations, and
agency costs.
Combine all of the above into a coherent logical approach to setting dividend
policy and come up with the value of the dividend.
Explain stock repurchases, stock dividends, and stock splits and why such actions
may (or may not) affect stockholders’ wealth.
Write Page 614-616 problems 13-3, 13-7 & 13-11. 20 points “SHOW ALL OF YOUR
WORK”
Read Gitman, Chapter 14
WORKING CAPITAL AND CURRENT ASSETS MANAGEMENT
Introduce the concept of working capital and how working capital management
adds value to the firm.
Present what managers must address in striking a balance in managing cash,
inventory and receivables.
Describe the cash conversion cycle, its funding requirements, and the key
strategies for managing it.
Identify with the management of receipts and disbursements, including float,
speeding collections, slowing payments, zero balance accounts, and investing in
marketable securities.
Write Page 660-663 problems 14-1, 14-3 & 14-13. 20 points “SHOW ALL OF YOUR
WORK”
Read Gitman, Chapter 15
CURRENT LIABILITIES MANAGEMENT
Review the key components of a firm’s credit terms and the procedures for
analyzing them.
Realize the effects of stretching accounts payable with the firms’ suppliers.
Describe the interest rates and basic types of unsecured bank sources of shortterm loans.
Calculate effective interest rates.
Write Page 694-696 problems 15-2, 15-8, 15-9, 15-10, 15-13. 20 points “SHOW ALL
OF YOUR WORK”
Read Gitman, Chapter 16, pp 708 – 717 (just the part on leasing)
LEASING vs. BORROW PURCHASE
Review the basic types of leases and leasing arrangements.
Evaluate the lease-versus-purchase decision.
Describe the effects of leasing on future financing and the advantages and
disadvantages of leasing.
Write Page 737 problem 16-4. 20 points “SHOW ALL OF YOUR WORK”