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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

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About Principles of Finance

Summary

Principles of Finance is targeted at the core finance course for undergraduate business majors. The book is designed for conceptual accessibility to students who are relatively early in their business curriculum (such as second-year students), yet it is also suitable for more advanced students. Due to the wide range of audiences and course approaches, the book is designed to be as flexible as possible. Its modular structure allows the introduction and review of content from prerequisite subjects in financial accounting, statistics, and economics, depending on student preparation. It provides a solid grounding in the core concepts of financial theory so that business students interested in a major or minor in finance will also be prepared for more rigorous upper-level courses. Concepts are further reinforced through applicable connections and practical calculation techniques for more detailed and realistic company scenarios from various industries.

Pedagogical Foundation

Principles of Finance emphasizes financial concepts relevant to people working in a variety of business functions. To illuminate the meaningful applications and implications of financial ideas, the book incorporates a unique use-case approach, providing connections among topics, solutions, and real-world problems. This multifaceted framework drives the integration of concepts while maintaining a modular chapter structure. Theoretical and practical aspects are presented in a balanced manner, and select ethical considerations are introduced, particularly in the context of corporate governance.

In order to create meaning for all students, Principles of Finance exposes them to a range of companies, industries, and scenarios reflecting different contexts. Examples of large companies such as Apple, Peloton, and American Airlines are balanced with small businesses—coffee shops, clothing stores, and salons—that may be more aligned with student experiences. The text includes authentic narratives from corporate finance, small business, and personal finance to drive relevance and interest of the discipline. Profiles and interviews include diverse figures in finance, such as Carlos Slim, Irina Simmons, Janet Yellen, and Ben Bernanke. Problems and exercises have been carefully constructed to place students into a range of settings and contexts as they develop knowledge and put it into practice. Finally, to reflect very recent experiences, the authors have incorporated several discussions regarding the COVID-19 pandemic and its impact on people and businesses.

Throughout, there is an emphasis on data use in business decision-making, with integrative sections on the importance and analysis of financial, economic, and statistical data. Data types include FRED® economic data, company financial statements, and stock prices. Practical techniques and calculation examples for data analysis with financial calculators (the Texas Instruments BA II Plus™ Professional model is used as the basis for example illustrations) and/or spreadsheets are included for relevant topics. For key chapters, downloadable Microsoft® Excel® data files are available for student reference. This technical feature provides students with access to the Excel data files used in the chapter examples for time value of money (Chapters 7, 8, 9) and statistics (Chapters 14, 15, 16) problems. The downloadable files for the chapters covering financial forecasting and trade credit (18 and 19) allow students to see how changing assumptions and variables impact financial decision-making. Chapters 13 and 14 (statistical and regression analysis, respectively) also include brief sections about the R software package to promote further interest in trends in data science.

Teaching Plan Options

Principles of Finance includes chapters on basic, applied, and integrative finance topics as well as key concepts from prerequisite financial accounting, quantitative methods (statistics), and economics courses. The chapters on prerequisite topics highlight examples relevant to finance students. For instructors with a limited one-semester schedule or whose students have solid knowledge of prerequisite disciplines, we recommend focusing on the “core” chapters, as indicated in the following table of contents:

1 Introduction to Finance Core
2 Corporate Structure and Governance Core
3 Economic Foundations: Money and Rates Extension
4 Accrual Accounting Process Extension
5 Financial Statements Core
6 Measures of Financial Health Core
7 Time Value of Money I: Single Payment Value Core
8 Time Value of Money II: Equal Multiple Payments Core
9 Time Value of Money III: Unequal Multiple Payment Values Core
10 Bonds and Bond Valuation Core
11 Stocks and Stock Valuation Core
12 Historical Performance of US Markets Core
13 Statistical Analysis in Finance Extension
14 Regression Analysis in Finance Extension
15 How to Think about Investing Core
16 How Companies Think about Investing Core
17 How Firms Raise Capital Core
18 Financial Forecasting Core
19 The Importance of Trade Credit and Working Capital in Planning Extension
20 Risk Management and the Financial Manager Extension
Table 1

Although chapters are written to be independent, they do generally build on the understanding in the previous core chapters. Please bear this in mind when considering alternate sequences.

Key Features to Drive Understanding

  • Concepts in Practice presents examples of financial challenges, managerial decisions, and the range of accepted business practice in companies and industries.
  • Think It Through guides students through the process of applying the concepts in the chapter to analyzing and interpreting data.
  • Link to Learning introduces students to online resources (further reading, data sources, or videos) that are pertinent to students’ exploration of the topic at hand.

Organizational and Reinforcement Materials to Support Learning

  • Learning Outcomes. Every section begins with a set of clear and concise learning outcomes (LOs). These outcomes are designed to help the instructor decide what content to include or assign and to guide students on what they can expect to learn.
  • Why It Matters. Chapter opening examples include real-world topics from corporate finance, small business, and personal finance to explain the relevance and interest of the topic for students.
  • CFA® Institute. For certain chapters, a topical connection to the learning outcome statements (LOS) for the Level I Study Sessions of the CFA Institute’s professional curriculum is indicated at the end of the chapter.
  • Summaries. Designed to support both students and instructors, chapter summaries distill the information in each section down to key, concise points.
  • Key Terms. Key terms are bold and are followed by an explanation in context. Definitions of key terms are also listed in a glossary that appears at the end of each module online and at the end of each chapter in print.
  • Assessments. A mix of multiple-choice questions, short-answer review questions, and quantitative problems is provided, depending on topic, providing opportunities for students to recall, discuss, and examine the concepts learned in each chapter.
    • Multiple-choice questions are basic review questions that test comprehension.
    • Short-answer questions are brief open-response questions that allow the application of concepts or critical thinking.
    • Quantitative problems range from single-variable to multistep or multivariable calculations, depending on the difficulty and application level of the chapter.
    • Sample answers and solutions are provided as part of the instructor resources.
  • Video Activity. This optional interactive activity at the end of every chapter provides reflection questions for students to apply to two online YouTube videos that offer a variety of corporate, economic, government, and skills-based examples and perspectives.

About the Authors

Senior Contributing Authors

Julie Dahlquist, Texas Christian University
Dr. Dahlquist is a professor of professional practice in the Finance Department of the Neeley School of Business at Texas Christian University. She holds a PhD from Texas A&M University, an MA from St. Mary’s University, a BBA from the University of Louisiana at Monroe, and a Chartered Market Technician® (CMT) designation. Previously, she served on the finance faculties of the University of Texas at San Antonio and St. Mary’s University. She has extensive international experience teaching finance to undergraduate, graduate, and executive MBA students in programs in Mexico, Austria, Germany, Switzerland, Italy, Belgium, Greece, and South Korea. Dr. Dahlquist is president of the Technical Analysis Educational Foundation (TAEF), which works with universities to include technical analysis as an integral part of their finance curricula. She has coauthored Technical Analysis: The Complete Resource for Financial Market Technicians (with Charles Kirkpatrick, 3rd edition, FT Press, 2015) and has contributed to many other scholarly publications. Her research has appeared in Financial Analysts Journal, Managerial Finance, Applied Economics, Working Money, Financial Practices and Education, and the Journal of Financial Education. Dr. Dahlquist has served as editor of the Journal of Technical Analysis, a member of the editorial board of the Southwestern Business Administration Journal, and a reviewer for several other journals.

Rainford Knight, Florida Atlantic University
Dr. Knight is adjunct faculty in the Finance Department of the College of Business at Florida Atlantic University and the director of its Financial Analyst Program, which he founded in partnership with Bloomberg in 2011. He holds a BBA, an MBA, and a PhD in finance from Florida Atlantic University. Dr. Knight is a member of the CFA Institute and a former director of the CFA Society of South Florida. He has extensive experience teaching finance at the undergraduate, graduate, and executive levels. Previously, he served on the finance faculty of Fairleigh Dickinson University. Dr. Knight has coauthored articles on corporate sustainability, cost-benefit analyses, mutual fund returns, and CEO compensation. He also has significant private industry experience in corporate finance, investment management, and hedge funds. He has been an adviser to CEOs of small to midsize companies on a variety of issues, including restructurings, valuation, financing, and acquisitions. Internationally, he was part of the consulting team advising a sovereign government on the restructuring of its financial sector and has also made presentations regarding financial sector restructuring to central banks in Latin America. Since 2021, Dr. Knight has been CEO and cofounder of Transparency Invest, which supports accountability in organizations.

Contributing Authors

Alan S. Adams, Dean College

Curtis J. Bacon, Southern Oregon University

Samantha T. Cooper, Buena Vista University

Michael P. Griffin, University of Massachusetts Dartmouth

Kevin C. Higgins, Maryville University

Larry Musolino, Pennsylvania State University

Reviewers

Curtis J. Bacon, Southern Oregon University

John Paul Broussard, Rutgers University

Jeffrey M. Brown, Johnson University

Raul S. Consunji, Salem State University

Aaron Cook, Pennsylvania State University

Samantha T. Cooper, Buena Vista University

Ramon P. DeGennaro, University of Tennessee

Francis H. Dong, formerly of The Catholic University of America

Wayne Durr, Western New England University

Fernando Garcia, California State University

Lenaye Harris, Utah State University

Kevin C. Higgins, Maryville University

Samira Hussein, Johnson County Community College

Jiya L. Jain, University of Maryland Global Campus

Robert Jozkowski, Eckerd College

Kristin Burke Martin, Franklin University

Michael McDonald, Fairfield University

Harini Mittal, Bronx Community College, City University of New York

Andrew Jason Novak, Southern New Hampshire University

Daniel E. Rhem, Pitt Community College

Sanjay Sharma, Columbia University

Dennis C. Shea, Upper Iowa University

Jere Smith, Southern New Hampshire University

Tih Koon Tan, University of the District of Columbia

Wilson Zehr, Eastern Oregon University

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