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Course Title:
Catalog Number:
Fundamentals of Finance
FN-118T
Semester Credit Hours: 3
3.1 Lecture
3.2 Lab
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Course Description: Examines the tools and techniques used in the world of finance. Students are introduced to basic financial concepts such as time value of money, asset valuation, risk analysis and return on investment. Evaluation and decision-making techniques will be used as they pertain to financial management in various business situations.
Prerequisites: AO-152T Financial Accounting
MT-120T Finite Math
General Course Competencies:
1.
Develop, understand and analyze financial statements.
2.
Define and demonstrate the fundamental concepts in financial management.
3.
Identify, differentiate and calculate financial assets and their return.
4.
Analyze the basics of capital budgeting, its risks and cost.
5.
Explain capital structure and the leverage effect.
6.
Discuss a dividend program and how it functions in a firm.
7.
Identify the techniques of financial forecasting.
8.
Identify and explain working capital management and the elements therein.
Course Objectives:
1.
Overview of Financial Management
1.1
Identify some of the forces that will affect financial management in the future.
1.2
Briefly explain the responsibilities of the financial staff within an organization
1.3
Describe the advantages and disadvantages of alterative forms of business organization.
1.4
State the primary goal in a publicly traded firm, and explain where social responsibility and business ethics fit in.
1.5
Define an agency relationship; give some examples of potential agency problems, and identify any possible solutions.
1.6
Identify major factors that determine the price of a company’s stock, including those which managers have control over and those which they do not.
2.
Financial Statements, Cash Flow and Taxes
2.1
Briefly explain the history of accounting and financial statements, and how financial statements are used.
2.2
List the types of information found in a corporation’s annual report.
2.3
Explain what a balance sheet is, the information it provides, and how assets and claims on assets are arranged on a balance sheet.
2.4
Explain what an income statement is and the information it provides.
2.5
Specify the changes reported in a firm’s statement of retained earning.
2.6
Distinguish the differences among accounting profit, net cash flow, and operating cash flow.
2.7
Identify the purpose of the statement of cash flows and list the factors reflected in this statement.
2.8
Define the terms market value added and economic value added, and explain how each is calculated.
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2.9
Explain why financial managers must be concerned with taxation, and list some of the most important elements of the current tax law.
3.
Analysis of Financial Statements
3.1
Explain why ratio analysis is usually the first step in the analysis of a company’s financial statements.
3.2
List the five groups of ratios and specify which ratios belong in each group.
3.3
State why trend analysis is important.
3.4
Describe how the DuPont system is used and how it may be modified to include the effect of financial leverage.
3.5
Explain “benchmarking” and its purpose.
3.6
List several limitations of ratio analysis.
3.7
Identify some of the qualitative factors that must be considered when evaluating a company’s financial performance.
4.
The Financial Environment: Markets, Institutions, and Interest Rates
4.1
List some of the many different types of financial markets, and identify several recent trends taking place in the financial marketplace.
4.2
Identify some of the most important money and capital market instruments and list the characteristics of each.
4.3
Describe three ways in which the transfer of capital takes place.
4.4
Compare and contrast major financial institutions.
4.5
Distinguish between the two basic types of stock markets and identify some trends that are taking place in security trading procedures.
4.6
Explain how capital is allocated in a supply/demand framework, and list the fundamental factors which affect the cost of money.
4.7
Write out two equations for the nominal, or quoted, interest rate and briefly discuss each component.
4.8
Discuss country risk and identify two factors which can cause exchange rates to fluctuate.
4.9
Define what is meant by the term structure of interest rates, and graph a yield cure for a given set of data.
4.10
Explain the two key factors that determine the shape of the yield curve.
4.11
List four additional factors that influence the level of interest rates and the slope of the yield curve.
4.12
Briefly explain how interest rate levels affect stock prices and corporate financial policy.
5.
Risk and Rate of Return
5.1
Define risk and calculate the expected rate of return.
5.2
Specify how risk aversion influences required rate of return.
5.3
State the basic proposition of the capital asset pricing model (CAPM) and explain how and why a portfolio’s risk may be reduced.
5.4
Graph diversifiable risk and market risk; explain which of these is relevant to a well-diversified investor.
5.5
Explain the significance of a stock’s beta coefficient, and use the Security Market Line to calculate a stock’s required rate of return.
5.6
List changes in the market or within a firm which would cause the required rate of return on the firm’s stock to change.
5.7
Identify concerns about beta and the CAPM
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6.
Time Value and Money
6.1
Convert time value of money (TVM) problems from words to timelines.
6.2
Explain the relationship between compounding and discounting; between future and present value.
6.3
Compute the future value of some beginning amount, and find the present value of a single payment to be received in the future.
6.4
Solve for time or interest rate given the other three variables in the TVM equation.
6.5
Find the future value of a series of equal, periodic payments as well as the present value of an annuity.
6.6
Explain the difference between an ordinary annuity and an annual due, and to calculate the difference in their values.
6.7
Calculate the value of perpetuity.
6.8
Demonstrate how to find the present and future value of an uneven series of cash flow.
6.9
Distinguish among the following interest rates: Nominal (or quoted) rate, periodic rate, and effective (or equivalent) annual rate; and properly compare between securities with different compounding periods.
6.10
Solve time value of money problems that involve fractional time periods.
6.11
Construct a loan amortization schedule.
7.
Bonds and Their Valuation
7.1
List the four main classifications of bonds and differentiate among them.
7.2
Identify the key characteristics common to all bonds.
7.3
Calculate the value of a bond with annual or semiannual interest payments.
7.4
Explain why the market value of an outstanding fixed-rate bond will fall when interest rates rise on new bonds of equal risk, or vice-versa.
7.5
Calculate the current yield, the yield to maturity, and/or the yield to call on a bond.
7.6
Differentiate between interest rate risk, reinvestment rate risk and default risk.
7.7
List the major types or corporate bonds and distinguish among them.
7.8
Explain the importance of bond ratings and list some of the criteria used to rate bonds.
7.9
Differentiate among the following terms: insolvent, liquidation, and reorganization.
8.
Stocks and Their Valuation
8.1
Briefly explain why classified stock might be used by a corporation and what founders’ shares are.
8.2
Differentiate between closely held and publicly owned corporations and list the three distinct types of stock market transactions.
8.3
Determine the value of a share of common stock where: dividends are expected to remain constant, dividends are expected to grow at some constant rate, and dividends are expected to grow at some supernormal or non-constant, growth rate.
8.4
Calculate the expected rate of return on a constant growth stock.
8.5
Explain the following terms: Equilibrium, marginal investor, and efficient markets hypothesis; and distinguish among the three levels of market efficiency.
8.6
Read and understand the stock market page given in the daily newspaper.
8.7
Explain the reasons for investing in international stocks and identify the “bets” an investor is making when he does invest overseas.
8.8
Define preferred stock, and determine the value of a share of preferred stock, or given its value, calculate its expected return.
9.
The Cost of Capital
9.1
Explain what is meant by a firm’s weighted average cost of capital.
9.2
Define and calculate the component costs of debt and preferred stock.
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9.3
Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings.
9.4
Calculate the component cost of newly issued common stock and explain why it is higher than the cost of retained earnings.
9.5
Calculate the firm’s composite, or weighted average, cost of capital.
9.6
Construct a firm’s marginal cost of capital (MCC) schedule and explain what causes the break points in this schedule.
9.7
Identify some of the factors that affect the cost of capital.
9.8
Define investment opportunity schedule (IOS) and explain how it is used in conjunction with the
MCC schedule in arriving at the firm’s optimal capital budget.
9.9
List some problem areas in estimating the cost of capital.
10.
The Basics of Capital Budgeting
10.1
Define capital budgeting, explain why it is important, and state how project proposals are generally classified.
10.2
List the steps involved in evaluating a capital budgeting project.
10.3
Calculate payback period, discounted payback period, net present value (NPV), and internal rate of return (IRR) for a given project and evaluate each method.
10.4
Briefly explain the problem of multiple IRRs and when this situation could occur.
10.5
Calculate the modified internal rate of return (MIRR) for a given project and evaluate this method.
10.6
Identify and explain the purposes of the post-audit in the capital budgeting process.
11.
Cash Flow Estimation and Other Topics in Capital Budgeting
11.1
Discuss difficulties and relevant considerations in estimating net cash flows.
11.2
Identify the three categories to which incremental cash flows can be classified.
11.3
Analyze an expansion project and make a decision whether the project should be accepted on the basis of standard capital budgeting techniques.
11.4
Analyze a replacement project and make a decision whether the project should be accepted on the basis of standard capital budgeting techniques.
11.5
Briefly explain the importance for U. S. companies to expand in foreign markets.
11.6
Compare replacement projects with unequal lives using both the replacement chain and the equivalent annual annuity approaches.
11.7
Incorporate inflationary expectation into cash flow estimation when considering capital budgeting decisions.
12.
Risk Analysis and the Optimal Capital Budget
12.1
Identify the three types of project risk.
12.2
Explain why stand-alone risk is often used as a proxy for the other two types of risk.
12.3
Demonstrate sensitivity and scenario analyses on a project and explain the Monte Carlo simulation.
12.4
Briefly explain the potential risks of directly investing abroad.
12.5
Identify and briefly explain two techniques used to estimate individual assets’ betas.
12.6
Discuss the pros and cons of whether firms should diversify to reduce risk.
12.7
Explain how the financial manager incorporates his or her assessment of project risk to adjust a project’s cost of capital.
12.8
Determine the optimal capital budget given a firm’s investment opportunity and marginal cost of capital schedules.
12.9
List the steps a firm goes through when establishing its optimal capital budget in practice.
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13.
Capital Structure and Leverage
13.1
List the four primary factors that influence capital structure decisions.
13.2
Distinguish between a firm’s business risk and its financial risk.
13.3
Explain how operating leverage contributes to a firm’s business risk and conduct a breakeven analysis, complete with breakeven chart.
13.4
Define financial leverage and explain its effect on expected ROE and the risk borne by stockholders.
13.5
Briefly explain what is meant by a firm’s optimal capital structure.
13.6
Explain the trade-off theory, signaling theory, and the effect of taxes and bankruptcy costs on capital structure.
13.7
List a number of factors or practical considerations firms generally consider when making capital structure decisions.
13.8
Briefly explain the extent that capital structure varies across different countries.
14.
Dividend Policy
14.1
Define target payout ratio and optimal dividend policy.
14.2
Discuss the three theories of investors’ dividend preference: the dividend irrelevance theory, the
“bird-in-the-hand” theory, and the tax preference theory and whether empirical evidence has determined which theory is best.
14.3
Explain the information content, or signaling, hypothesis and the clientele effect.
14.4
Identify the two components of dividend stability, and briefly explain what a “stable dividend policy” means.
14.5
Explain the logic of the residual dividend policy, and state why firms are more likely to use this policy in setting a long-run target than as a strict determination of dividends in a given year.
14.6
Discuss why a company might change its dividend policy and what the best strategy for announcing dividend policy changes is.
14.7
Explain the use of dividend reinvestment plans, distinguish between the two types of plans, and discuss why the plans are popular with certain investors.
14.8
List a number of factors that influence dividend policy in practice.
14.9
Discuss why the dividend decision is made jointly with capital structure and capital budgeting decisions.
14.10
Specify why a firm might split its stock or pay a stock dividend.
14.11
Discuss stock repurchases, including the effects on EPS, the stock price, and the firm’s capital structure.
15.
Financial Forecasting
15.1
Discuss the importance of sales forecasts in the financial planning process, and why managers construct pro forma financial statements.
15.2
Briefly explain the steps involved in the constant ratio method.
15.3
Calculate additional funds needed (AFN), using both the balance sheet approach and the formula method.
15.4
Explain the conditions under which the constant ratio method should not be used.
15.5
Identify other techniques for forecasting financial statements and explain when they should be used.
15.6
List the advantages of computerized financial planning models over “pencil-and-paper” calculations.
16.
Managing Current Assets
16.1
Define basic working capital terminology.
16.2
Distinguish between a relaxed and a restricted working capital investment policy, and explain the effect of each on risk and expected return.
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16.3
Explain how EVA methodology provides a useful way of thinking about working capital.
16.4
Briefly explain the basic idea of zero working capital.
16.5
List the reasons for holding cash.
16.6
Construct a cash budget, and explain its purpose.
16.7
Briefly explain useful tools and procedures for effectively managing cash inflow and outflows.
16.8
Explain why firms are likely to hold marketable securities.
16.9
State the goal of inventory management and identity the three categories of inventory costs.
16.10
16.11
Identify and briefly explain the use of several inventory control systems.
Monitor a firm’s receivables position by calculating its DSO and reviewing aging
16.12
schedules.
List and explain the four elements of a firm’s credit policy, and identify other factors influencing credit policy.
17.
Financing Current Assets
17.1
Identify and distinguish among the three different current asset financing policies.
17.2
Briefly explain the advantages and disadvantages of short-term financing.
17.3
List the four major types of short-term funds.
17.4
Distinguish between free and costly trade credit, and calculate both the nominal and effective annual percentage cost of not taking a discount—given specific credit terms.
17.5
Describe the importance of bank loans as source of short-term financing and discuss some of the key features of bank loans.
17.6
Calculate the effective interest rate for: simple interest, discount interest, add-on interest loans, and explain the effect of compensating balances on the effective cost of a loan.
17.7
List some factors that should be considered when choosing a bank.
17.8
Define what a “secured” loan is and what type of collateral can be used to secure a loan.
Course Bibliography:
Finance Investments, Institutions, Management, by Eakins, 2 nd Edition. Publisher: Addison Wesley.
ISBN: 0321-289-757
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Grading Criteria:
100% - 90% = A
89% - 80% = B
79% - 70% = C
69% - 60% = D
59% - 0% = F
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