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Table of contents
  1. Preface
  2. 1 Introduction to Finance
    1. Why It Matters
    2. 1.1 What Is Finance?
    3. 1.2 The Role of Finance in an Organization
    4. 1.3 Importance of Data and Technology
    5. 1.4 Careers in Finance
    6. 1.5 Markets and Participants
    7. 1.6 Microeconomic and Macroeconomic Matters
    8. 1.7 Financial Instruments
    9. 1.8 Concepts of Time and Value
    10. Summary
    11. Key Terms
    12. Multiple Choice
    13. Review Questions
    14. Video Activity
  3. 2 Corporate Structure and Governance
    1. Why It Matters
    2. 2.1 Business Structures
    3. 2.2 Relationship between Shareholders and Company Management
    4. 2.3 Role of the Board of Directors
    5. 2.4 Agency Issues: Shareholders and Corporate Boards
    6. 2.5 Interacting with Investors, Intermediaries, and Other Market Participants
    7. 2.6 Companies in Domestic and Global Markets
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Video Activity
  4. 3 Economic Foundations: Money and Rates
    1. Why It Matters
    2. 3.1 Microeconomics
    3. 3.2 Macroeconomics
    4. 3.3 Business Cycles and Economic Activity
    5. 3.4 Interest Rates
    6. 3.5 Foreign Exchange Rates
    7. 3.6 Sources and Characteristics of Economic Data
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  5. 4 Accrual Accounting Process
    1. Why It Matters
    2. 4.1 Cash versus Accrual Accounting
    3. 4.2 Economic Basis for Accrual Accounting
    4. 4.3 How Does a Company Recognize a Sale and an Expense?
    5. 4.4 When Should a Company Capitalize or Expense an Item?
    6. 4.5 What Is “Profit” versus “Loss” for the Company?
    7. Summary
    8. Key Terms
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  6. 5 Financial Statements
    1. Why It Matters
    2. 5.1 The Income Statement
    3. 5.2 The Balance Sheet
    4. 5.3 The Relationship between the Balance Sheet and the Income Statement
    5. 5.4 The Statement of Owner’s Equity
    6. 5.5 The Statement of Cash Flows
    7. 5.6 Operating Cash Flow and Free Cash Flow to the Firm (FCFF)
    8. 5.7 Common-Size Statements
    9. 5.8 Reporting Financial Activity
    10. Summary
    11. Key Terms
    12. CFA Institute
    13. Multiple Choice
    14. Review Questions
    15. Problems
    16. Video Activity
  7. 6 Measures of Financial Health
    1. Why It Matters
    2. 6.1 Ratios: Condensing Information into Smaller Pieces
    3. 6.2 Operating Efficiency Ratios
    4. 6.3 Liquidity Ratios
    5. 6.4 Solvency Ratios
    6. 6.5 Market Value Ratios
    7. 6.6 Profitability Ratios and the DuPont Method
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  8. 7 Time Value of Money I: Single Payment Value
    1. Why It Matters
    2. 7.1 Now versus Later Concepts
    3. 7.2 Time Value of Money (TVM) Basics
    4. 7.3 Methods for Solving Time Value of Money Problems
    5. 7.4 Applications of TVM in Finance
    6. Summary
    7. Key Terms
    8. CFA Institute
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  9. 8 Time Value of Money II: Equal Multiple Payments
    1. Why It Matters
    2. 8.1 Perpetuities
    3. 8.2 Annuities
    4. 8.3 Loan Amortization
    5. 8.4 Stated versus Effective Rates
    6. 8.5 Equal Payments with a Financial Calculator and Excel
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Problems
    12. Video Activity
  10. 9 Time Value of Money III: Unequal Multiple Payment Values
    1. Why It Matters
    2. 9.1 Timing of Cash Flows
    3. 9.2 Unequal Payments Using a Financial Calculator or Microsoft Excel
    4. Summary
    5. Key Terms
    6. CFA Institute
    7. Multiple Choice
    8. Review Questions
    9. Problems
    10. Video Activity
  11. 10 Bonds and Bond Valuation
    1. Why It Matters
    2. 10.1 Characteristics of Bonds
    3. 10.2 Bond Valuation
    4. 10.3 Using the Yield Curve
    5. 10.4 Risks of Interest Rates and Default
    6. 10.5 Using Spreadsheets to Solve Bond Problems
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  12. 11 Stocks and Stock Valuation
    1. Why It Matters
    2. 11.1 Multiple Approaches to Stock Valuation
    3. 11.2 Dividend Discount Models (DDMs)
    4. 11.3 Discounted Cash Flow (DCF) Model
    5. 11.4 Preferred Stock
    6. 11.5 Efficient Markets
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  13. 12 Historical Performance of US Markets
    1. Why It Matters
    2. 12.1 Overview of US Financial Markets
    3. 12.2 Historical Picture of Inflation
    4. 12.3 Historical Picture of Returns to Bonds
    5. 12.4 Historical Picture of Returns to Stocks
    6. Summary
    7. Key Terms
    8. Multiple Choice
    9. Review Questions
    10. Video Activity
  14. 13 Statistical Analysis in Finance
    1. Why It Matters
    2. 13.1 Measures of Center
    3. 13.2 Measures of Spread
    4. 13.3 Measures of Position
    5. 13.4 Statistical Distributions
    6. 13.5 Probability Distributions
    7. 13.6 Data Visualization and Graphical Displays
    8. 13.7 The R Statistical Analysis Tool
    9. Summary
    10. Key Terms
    11. CFA Institute
    12. Multiple Choice
    13. Review Questions
    14. Problems
    15. Video Activity
  15. 14 Regression Analysis in Finance
    1. Why It Matters
    2. 14.1 Correlation Analysis
    3. 14.2 Linear Regression Analysis
    4. 14.3 Best-Fit Linear Model
    5. 14.4 Regression Applications in Finance
    6. 14.5 Predictions and Prediction Intervals
    7. 14.6 Use of R Statistical Analysis Tool for Regression Analysis
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  16. 15 How to Think about Investing
    1. Why It Matters
    2. 15.1 Risk and Return to an Individual Asset
    3. 15.2 Risk and Return to Multiple Assets
    4. 15.3 The Capital Asset Pricing Model (CAPM)
    5. 15.4 Applications in Performance Measurement
    6. 15.5 Using Excel to Make Investment Decisions
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  17. 16 How Companies Think about Investing
    1. Why It Matters
    2. 16.1 Payback Period Method
    3. 16.2 Net Present Value (NPV) Method
    4. 16.3 Internal Rate of Return (IRR) Method
    5. 16.4 Alternative Methods
    6. 16.5 Choosing between Projects
    7. 16.6 Using Excel to Make Company Investment Decisions
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  18. 17 How Firms Raise Capital
    1. Why It Matters
    2. 17.1 The Concept of Capital Structure
    3. 17.2 The Costs of Debt and Equity Capital
    4. 17.3 Calculating the Weighted Average Cost of Capital
    5. 17.4 Capital Structure Choices
    6. 17.5 Optimal Capital Structure
    7. 17.6 Alternative Sources of Funds
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  19. 18 Financial Forecasting
    1. Why It Matters
    2. 18.1 The Importance of Forecasting
    3. 18.2 Forecasting Sales
    4. 18.3 Pro Forma Financials
    5. 18.4 Generating the Complete Forecast
    6. 18.5 Forecasting Cash Flow and Assessing the Value of Growth
    7. 18.6 Using Excel to Create the Long-Term Forecast
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  20. 19 The Importance of Trade Credit and Working Capital in Planning
    1. Why It Matters
    2. 19.1 What Is Working Capital?
    3. 19.2 What Is Trade Credit?
    4. 19.3 Cash Management
    5. 19.4 Receivables Management
    6. 19.5 Inventory Management
    7. 19.6 Using Excel to Create the Short-Term Plan
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Video Activity
  21. 20 Risk Management and the Financial Manager
    1. Why It Matters
    2. 20.1 The Importance of Risk Management
    3. 20.2 Commodity Price Risk
    4. 20.3 Exchange Rates and Risk
    5. 20.4 Interest Rate Risk
    6. Summary
    7. Key Terms
    8. CFA Institute
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  22. Index
1.
ABC Company has the following data for its monthly sales. Complete the % of Annual Sales row.The monthly income statement of ABC company shows gross sales by month: January - $40,000; February - $42,000; March - $47,000; April - $56,000; May - $60,000; June - $71,000; July - $53,000; August - $53,000; September - $46,000; October - $37,000; November - $39,000; and December - $31,000.  The total sales for the year is $575,000.
2.
Using the same data as in Problem 1, assume that ABC Company expects a 10% increase in sales in the coming year (10% more than the $575,000 it had in the past year). Prepare its sales forecast, assuming the company breaks its sales down by month using the same percentages as the actual sales from the past year, which you calculated in the first problem. Monthly income statement of ABC company shows empty cells for gross sales on a monthly basis and the percentage of annual sales.
3.
ABC Company anticipates its sales being a bit lower than normal in January and February of the coming year due to major road construction on the street where it is located, which will draw away foot traffic from the store. The company anticipates that this will reduce its sales in these two months by 5%. Use the information from Problems 1–2 to update the sales forecast.
4.
ABC Company’s cost of goods sold last year was 60%. It anticipates that this will be the same in the coming year. Its sales returns and allowances are small, normally 1% of sales. Use the information from Problems 1–3 to estimate the company’s sales returns and allowances, net sales, and cost of goods sold and calculate its gross margin. The monthly income statement of ABC company shows gross sales by month: January - $41,800; February - $43,890; March - $51,700; April - $61,600; May - $66,000; June - $78,100; July - $58,300; August - $58,300; September - $50,600; October - $40,700; November - $42,900; and December - $34,100.  The total sales for the year is $627,990. It also shows the % of annual sales by month: January – 7%; February – 7.3%; March – 8.2%; April – 9.7%; May – 10.4%; June – 12.3%; July – 9.2%; August – 9.2%; September – 8.0%; October – 6.4%; November – 6.8%; and December – 5.4%.  The total percentage for all of the months equals 100%. There are blank cells for every month for the sales returns and allowances, net sales, cost of goods sold, and gross margin.
5.
Use the partial income statement generated in Problem 4 along with the following additional information to complete ABC Company’s forecasted income statement in Excel.
  1. Rent expense is $1,000 per month. However, the landlord has indicated that rent will go up to $1,250 in the fourth quarter.
  2. Depreciation expense is $2,250 per month and does not change throughout the year.
  3. Salaries expense is $1,500 per month and is expected to go up by 10% in the second half of the year, when a new compensation plan will be implemented.
  4. Utilities expense is $5,000 for the entire year and should be allocated to each month based on that month’s percentage of annual sales.
  5. Interest expense is $500 per month.
  6. Income tax is 25% of operating income less interest expense.
The monthly income statement of ABC company shows gross sales by month: January - $41,800; February - $43,890; March - $51,700; April - $61,600; May - $66,000; June - $78,100; July - $58,300; August - $58,300; September - $50,600; October - $40,700; November - $42,900; and December - $34,100.  The total sales for the year is $627,990. It also shows the % of annual sales by month: January – 7%; February – 7.3%; March – 8.2%; April – 9.7%; May – 10.4%; June – 12.3%; July – 9.2%; August – 9.2%; September – 8.0%; October – 6.4%; November – 6.8%; and December – 5.4%.  The total percentage for all of the months equals 100%. The sales returns and allowances by month are: January - $418; February - $439; March - $517; April - $616; May - $660; June - $781; July - $583; August - $583; September - $506; October - $407; November - $429; December - $341. The total sales returns and allowances for the year are $6,280. The net sales by month are: January - $41,382; February - $43451; March - $51,183; April - $60,984; May - $65,340; June - $77,319; July - $57,717; August - $57,717; September - $50,094; October - $40,293; November - $42,471; December - $33,759. The total net sales for the year are $621,710. The cost of goods sold by month are: January - $24,829; February - $26,071; March - $30,710; April - $36,590; May - $39,204; June - $46,391; July - $34,630; August - $34,630; September - $30,056; October - $24,176; November - $25,483; and December - $20,255. The total cost of goods sold for the year are $373,026. The gross margin by month are: January - $16,553; February - $17,380; March - $20,473; April - $24,394; May - $26,136; June - $30,928; July - $23,087; August - $23,087; September - $20,038; October - $16,117; November - $16,988; and December - $13,504. The total gross margin for the year is $248,684. There are blank cells for each month for rent expense, depreciation expense, salaries expense, utility expense, operating income, interest expense, income tax expense, and net income.
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