Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
INSTRUCTOR MANUAL
Instructor’s Manual for Principles of Finance
03/21/22 1
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Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
,Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
Instructor’s Manual for Principles of Finance
Chapter 1
Introduction to Finance
Lecture Outline
1.1 What Is Finance?
Rather than thinking of finance as one thing, students might better think of finance as an
architecture of components that, when combined, facilitate companies and individuals to
initiate, manage, and sustain their businesses. There are many members of the finance family
including business finance, investments, and financial markets and institutions.
Looking specifically at business finance, or how a company conducts its internal financial
affairs, one can see three distinct yet interrelated subfields: working capital management;
capital budgeting, or how company expenditures are made to increase its long-term value; and
finally capital structure, or how the company finances the assets it holds. Students should
understand that all three areas must work together for a company to operate effectively.
The term investments can mean different things in finance, depending the context of the word.
The two primary usages are investments one might make in a financial instrument to generate
a return, like interest or dividends. The second usage applies more to the theme of business
finance. This is when investment means a company’s investment in itself! This means that the
company spends money on assets that leads to future growth. Examples include building a new
factory or buying a related business.
Financial markets and institutions are, collectively, the vehicles enabling companies to achieve
their business finance and investment objectives. Financial markets and institutions can broadly
be split between banking and securities. The United States has a long and complex web of
financial regulations. Because of abuses in the finance industry during the 1920s, when there
was little separation between banking and securities, a long series of regulations were enacted
beginning in the 1930s that have the central purpose of protecting investors, depositors, and
borrowers.
Found throughout finance, whether in investments, business finance, or markets and
institutions, is the relationship between risk and return. For example, if an investor seeks higher
return, then they must take more risk. From a different perspective, if a company seeks to
finance a riskier project, it must expect to pay higher funding costs. The idea of “return” is
straightforward—for example, dividends from stock or interest from bonds. However, risk can
be less clear. Risk, broadly, means the probability of not realizing the return expected. So, risk
does not necessarily mean you lose your investment, it means your return on the investment
may differ from your expectations.
1.2 The Role of Finance in an Organization
Whether within a company or out in the financial markets, the functions of finance are varied,
and the titles of those who perform those functions vary accordingly. Students may have heard
03/21/22 2
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Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
,Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
Instructor’s Manual for Principles of Finance
of these corporate titles but lack understanding of what these individuals do within the firm. If
you think from the perspective of business finance, the most senior financial position is the
chief financial officer, CFO. This person is the final authority for all financial activities of the
firm. The CFO’s focus is strategic as opposed to tactical. Reporting to the CFO is normally a vice
president of finance, a member of middle management who brings together the two corporate
finance functions of treasury with financial operations. The ongoing financing of the company,
particularly from external sources, resides with the treasurer. Execution of business operations
that impact finances is the purview of the controller, also a member of middle management.
While the treasurer interacts with the firm’s bankers and outside financial markets, the
controller follows established procedures to pay bills and collect receipts and maintain the
financial books.
Both the treasury and controller “sides of the house” look backward and forward to develop
financial plans. Historic (“looking backward”) data show where the company has been and is
the basis for estimating what might happen in the future (“looking forward”). These projections
for the future are essential for effective management planning decisions. Some firms use top-
down planning (senior management provides the plan, which is passed down to departments
for implementation), others employ bottom-up planning (plans by individual departments are
consolidated up into one whole), and still others combine the two approaches. Whichever
approach is used, forecasting for future periods (month, year, etc.) and related budgets are
essential roadmaps for businesses. They establish goals and establish benchmarks against
which actual performance can be measured. Both internal users such as management and
external ones such as Wall Street analysts are keenly interested in companies’ forecasts.
1.3 Importance of Data and Technology
In order for any of the finance functions to do their jobs, accurate, timely, appropriate data is
needed. Company management relies on internally generated data for measuring and
benchmarking operating performance in order to make ongoing business decisions. Similarly,
historic data is used as the basis for company budgets, forecasts, and capital expenditure
planning. External stakeholders are reliant on data provided by the company to make
investment, lending, regulatory, and many other decisions. They have open access to publicly
available financial information and rely on relationships with company managers to provide an
extra level of understanding of the numbers.
The heart of the information provided, internally or externally, is found in the three primary
financial statements all companies prepare: income statement, balance sheet, and statement of
cash flows. For most external stakeholders, these financial statements are prepared by US
companies according to Generally Accepted Accounting Principles (GAAP) and audited by
outside accounting firms. If the company has publicly traded securities, these three statements
are included in mandatory financial filings with the US Securities and Exchange Commission. For
internal users, companies typically prepare similar financial statements, but they reflect the
needs of management decision-making rather than strictly following GAAP accounting. In other
words, public companies must provide audited, GAAP-adherent financial statements, but they
03/21/22 3
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Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
, Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
Instructor’s Manual for Principles of Finance
also use financial statements and forecasts that focus on the company’s cash flow rather than
accounting values.
1.4 Careers in Finance
Careers in finance are of course as varied as the many finance functions described previously.
As a foundation, a person seeking a career in finance needs to be “good with numbers,” have
an interest in money, and be analytically oriented. From these seeds the financial field expands
into a vast range of disciplines requiring wide-ranging skills. Although certain job titles
emphasize certain skills, being successful in finance requires the professional to be capable in
many. For example, a bank lending officer must be well skilled in evaluating a lending
transaction. But at the same time, they must have strong people skills to negotiate with the
client and must be knowledge about the market conditions that might impact interest rates. A
broad skill set is necessary in all areas of finance, but no matter what subfield one pursues, it is
abundantly clear that finance and technology are hand-and-glove partners. The great increase
in productivity and efficiency in finance stands on the shoulders of technology innovations. As
an example, not too many years ago, people would walk into a bank to cash a check, make a
deposit, or borrow money. Today, many banking services are completed online from the
convenience of one’s home. In many ways this has benefited consumers and, importantly, has
drastically reduced banks’ costs of providing these services. Of course, there is a very human
downside to this trend—job loss in banking. This has been especially acute in retail banking.
1.5 Markets and Participants
Modern financial markets are enormously broad, deep, and complex structures comprised of
myriad products, participants, and processes. Yet the multitrillion-dollar financial market might
be thought of in very simple terms—a buyer and seller coming together to make a trade. In
fact, that’s what a market is, whether in medieval Lyon or 21st-century Wall Street.
One way to begin describing the financial markets is through the lens of time. From this
perspective, one can think of financial assets—any financial asset—in terms of when they are
traded. After the toil and trouble of building its business, a company now wants to “go public.”
This means selling shares in the company to the public. This is a major step for any company.
Among many other things, the company now takes on duties and responsibilities to its newly
acquired owners, public shareholders. The event that marks this transition from private to
public company is the initial public offering (of shares)—the familiar “IPO.” This specific
transaction, the IPO, is referred to as the primary market—primary because it is the first time
the company’s shares are sold to the public. The important feature of this event is that when
shares are sold by the issuing company and bought by investors, the proceeds of the sale go
from investor to company. Once shares are held by the public, if an investor decides not to own
their shares anymore, those shares are not sold back to the corporate issuer, but to another
investor instead. This trade is considered the secondary market. To reiterate, primary and
secondary markets are not actual places but references to when a security is bought and sold.
03/21/22 4
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Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
INSTRUCTOR MANUAL
Instructor’s Manual for Principles of Finance
03/21/22 1
Finance-SOLUTION MANUALOPENSTAX.pdf%%%%%%%%%%%%%%%%%%%%%%%%%%%%
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
,Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
Instructor’s Manual for Principles of Finance
Chapter 1
Introduction to Finance
Lecture Outline
1.1 What Is Finance?
Rather than thinking of finance as one thing, students might better think of finance as an
architecture of components that, when combined, facilitate companies and individuals to
initiate, manage, and sustain their businesses. There are many members of the finance family
including business finance, investments, and financial markets and institutions.
Looking specifically at business finance, or how a company conducts its internal financial
affairs, one can see three distinct yet interrelated subfields: working capital management;
capital budgeting, or how company expenditures are made to increase its long-term value; and
finally capital structure, or how the company finances the assets it holds. Students should
understand that all three areas must work together for a company to operate effectively.
The term investments can mean different things in finance, depending the context of the word.
The two primary usages are investments one might make in a financial instrument to generate
a return, like interest or dividends. The second usage applies more to the theme of business
finance. This is when investment means a company’s investment in itself! This means that the
company spends money on assets that leads to future growth. Examples include building a new
factory or buying a related business.
Financial markets and institutions are, collectively, the vehicles enabling companies to achieve
their business finance and investment objectives. Financial markets and institutions can broadly
be split between banking and securities. The United States has a long and complex web of
financial regulations. Because of abuses in the finance industry during the 1920s, when there
was little separation between banking and securities, a long series of regulations were enacted
beginning in the 1930s that have the central purpose of protecting investors, depositors, and
borrowers.
Found throughout finance, whether in investments, business finance, or markets and
institutions, is the relationship between risk and return. For example, if an investor seeks higher
return, then they must take more risk. From a different perspective, if a company seeks to
finance a riskier project, it must expect to pay higher funding costs. The idea of “return” is
straightforward—for example, dividends from stock or interest from bonds. However, risk can
be less clear. Risk, broadly, means the probability of not realizing the return expected. So, risk
does not necessarily mean you lose your investment, it means your return on the investment
may differ from your expectations.
1.2 The Role of Finance in an Organization
Whether within a company or out in the financial markets, the functions of finance are varied,
and the titles of those who perform those functions vary accordingly. Students may have heard
03/21/22 2
Finance-SOLUTION MANUALOPENSTAX.pdf%%%%%%%%%%%%%%%%%%%%%%%%%%%%
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
,Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
Instructor’s Manual for Principles of Finance
of these corporate titles but lack understanding of what these individuals do within the firm. If
you think from the perspective of business finance, the most senior financial position is the
chief financial officer, CFO. This person is the final authority for all financial activities of the
firm. The CFO’s focus is strategic as opposed to tactical. Reporting to the CFO is normally a vice
president of finance, a member of middle management who brings together the two corporate
finance functions of treasury with financial operations. The ongoing financing of the company,
particularly from external sources, resides with the treasurer. Execution of business operations
that impact finances is the purview of the controller, also a member of middle management.
While the treasurer interacts with the firm’s bankers and outside financial markets, the
controller follows established procedures to pay bills and collect receipts and maintain the
financial books.
Both the treasury and controller “sides of the house” look backward and forward to develop
financial plans. Historic (“looking backward”) data show where the company has been and is
the basis for estimating what might happen in the future (“looking forward”). These projections
for the future are essential for effective management planning decisions. Some firms use top-
down planning (senior management provides the plan, which is passed down to departments
for implementation), others employ bottom-up planning (plans by individual departments are
consolidated up into one whole), and still others combine the two approaches. Whichever
approach is used, forecasting for future periods (month, year, etc.) and related budgets are
essential roadmaps for businesses. They establish goals and establish benchmarks against
which actual performance can be measured. Both internal users such as management and
external ones such as Wall Street analysts are keenly interested in companies’ forecasts.
1.3 Importance of Data and Technology
In order for any of the finance functions to do their jobs, accurate, timely, appropriate data is
needed. Company management relies on internally generated data for measuring and
benchmarking operating performance in order to make ongoing business decisions. Similarly,
historic data is used as the basis for company budgets, forecasts, and capital expenditure
planning. External stakeholders are reliant on data provided by the company to make
investment, lending, regulatory, and many other decisions. They have open access to publicly
available financial information and rely on relationships with company managers to provide an
extra level of understanding of the numbers.
The heart of the information provided, internally or externally, is found in the three primary
financial statements all companies prepare: income statement, balance sheet, and statement of
cash flows. For most external stakeholders, these financial statements are prepared by US
companies according to Generally Accepted Accounting Principles (GAAP) and audited by
outside accounting firms. If the company has publicly traded securities, these three statements
are included in mandatory financial filings with the US Securities and Exchange Commission. For
internal users, companies typically prepare similar financial statements, but they reflect the
needs of management decision-making rather than strictly following GAAP accounting. In other
words, public companies must provide audited, GAAP-adherent financial statements, but they
03/21/22 3
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Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
, Finance-SOLUTION MANUALOPENSTAX.pdf!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RRRRRR$$$$$$$$$$$$$$#!!!!!!!!!!!!!!!!
Finance-SOLUTION
Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~`
MANUALOPENSTAX.pdf###################@@@@@@@@@@@@@
Instructor’s Manual for Principles of Finance
also use financial statements and forecasts that focus on the company’s cash flow rather than
accounting values.
1.4 Careers in Finance
Careers in finance are of course as varied as the many finance functions described previously.
As a foundation, a person seeking a career in finance needs to be “good with numbers,” have
an interest in money, and be analytically oriented. From these seeds the financial field expands
into a vast range of disciplines requiring wide-ranging skills. Although certain job titles
emphasize certain skills, being successful in finance requires the professional to be capable in
many. For example, a bank lending officer must be well skilled in evaluating a lending
transaction. But at the same time, they must have strong people skills to negotiate with the
client and must be knowledge about the market conditions that might impact interest rates. A
broad skill set is necessary in all areas of finance, but no matter what subfield one pursues, it is
abundantly clear that finance and technology are hand-and-glove partners. The great increase
in productivity and efficiency in finance stands on the shoulders of technology innovations. As
an example, not too many years ago, people would walk into a bank to cash a check, make a
deposit, or borrow money. Today, many banking services are completed online from the
convenience of one’s home. In many ways this has benefited consumers and, importantly, has
drastically reduced banks’ costs of providing these services. Of course, there is a very human
downside to this trend—job loss in banking. This has been especially acute in retail banking.
1.5 Markets and Participants
Modern financial markets are enormously broad, deep, and complex structures comprised of
myriad products, participants, and processes. Yet the multitrillion-dollar financial market might
be thought of in very simple terms—a buyer and seller coming together to make a trade. In
fact, that’s what a market is, whether in medieval Lyon or 21st-century Wall Street.
One way to begin describing the financial markets is through the lens of time. From this
perspective, one can think of financial assets—any financial asset—in terms of when they are
traded. After the toil and trouble of building its business, a company now wants to “go public.”
This means selling shares in the company to the public. This is a major step for any company.
Among many other things, the company now takes on duties and responsibilities to its newly
acquired owners, public shareholders. The event that marks this transition from private to
public company is the initial public offering (of shares)—the familiar “IPO.” This specific
transaction, the IPO, is referred to as the primary market—primary because it is the first time
the company’s shares are sold to the public. The important feature of this event is that when
shares are sold by the issuing company and bought by investors, the proceeds of the sale go
from investor to company. Once shares are held by the public, if an investor decides not to own
their shares anymore, those shares are not sold back to the corporate issuer, but to another
investor instead. This trade is considered the secondary market. To reiterate, primary and
secondary markets are not actual places but references to when a security is bought and sold.
03/21/22 4
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Finance-SOLUTION MANUALOPENSTAX.pdf~~~~~~~~~~~~~~~~~~~~~~!!!!!!!!!
Finance-SOLUTION MANUALOPENSTAX.pdf##############@@@@@@@@@@@@@!!!!!
