BAM 313 Introduction to Financial Management

Foundations of Finance: The Logic and Practice
of Financial Management
6th Edition, 2008
Arthur J. Keown, John D. Martin, J. William Petty, and David F. Scott, Jr.
Pearson/Prentice Hall
925 N. Spurgeon Street, Santa Ana, CA 92701 Phone: 714-547-9625 Fax: 714-547-5777
BAM 313
Introduction to Financial Management
Study Guide

Attention Students:
If you are taking a quantitative course such as fnance, you may fnd it helpful to use a
fnancial calculator.
These calculators are inexpensive and may be purchased for about $25 through Amazon
or other online sites. The HP 10BII, TI BAII Plus and Sharp EL-733A are among the
most popular.
The following website provides detailed tutorials on how to use a fnancial calculator. Go
to the website listed below and click on the calculator you have chosen for step-by-step
instructions on how to successfully work through various calculations.
For assistance, please contact California Coast University’s Student Services Department
at (714) 547-9625.
Message From
the President
Introduction to Financial Management
Welcome to California Coast University. I hope you will fnd this course interesting and useful throughout your career.
This course was designed to meet the unique needs of students like you
who are both highly motivated and capable of completing a degree
program through distance learning. Our faculty and administration have
been involved in distance learning for almost forty years and understand
the characteristics common to successful students in this unique
educational environment. This course was prepared by CCU faculty
members who are not only outstanding educators, but who have real
world experience as well. They have prepared these guidelines to help you
successfully complete your educational goals and to get the most from
your distance learning experience.
Again, we hope that you will fnd this course both helpful and
motivating. We send our best wishes as you work toward the completion
of your degree.
Thomas M. Neal

All rights reserved. No part of this book may be reproduced or transmitted
in any form or by any means, electronic or mechanical, including photocopying,
recording, or by any information storage and retrieval system without written
permission from the publisher, except for the inclusion of brief quotation
in review.
Copyright © 2009 by California Coast University
First Printing 2002

Introduction to Financial Management

Course NumberBAM313
Course TitleIntroduction to Financial Management
Catalog DescriptionThis course introduces students to the elementary principles and
motives of fnancial management, and covers basic fundamental
principles of short-term fnancing, time value of money, risk and
value, and cost. Students will understand the interrelationships
underlying the various data and techniques in which fnancial
decisions are based, and will be able to analyze fnancial data and
apply basic concepts to make confdent fnancial decisions in their
respective business futures.
Units of Credit3 Units of Credit
Course ObjectivesUpon successful completion of this course, students will be able to:
Understand the scope and environment of fnancial management.
Comprehend the valuation of fnancial assets.
Confdently understand investment in long term assets.
Analyze capital structure and dividend policy.
Learning ResourcesTextbook:Foundations of Finance: The Logic and Practice of
Financial Management
6th Edition, 2008
Arthur J. Keown, John D. Martin, J. William Petty, David
F. Scott, Jr.
All course examinations are based on the contents of the textbook
required for this course. To successfully complete the examinations,
you will need the textbook. You may rent the textbook from our Rental
Library or you may purchase the textbook from other sources.
The Study Guide
The Study Guide was designed to help you further understand the
material in the textbook and master the course content. Each Study
Guide chapter corresponds to a chapter in the textbook.
Additional Readings and Online Resources
To help you to further understand this subject material, additional
readings and online resources related to this course are listed in this

Introduction to Financial Management

The Library Information and Resources Network, Inc. (LIRN)
The Library Information and Resources Network (LIRN) is an online
library resource that provides access to multiple research databases.
CCU doctoral candidates who enrolled in their program after
February 1, 2010 receive complimentary access to LIRN.
If you are a current student enrolled in another CCU program and
wish to request access to LIRN, you may do so for a one-time fee of
$25. Please contact the CCU Library to fll out a Request for Online
Library Resources form and submit it, with payment, to the
University. You will be emailed a confdential identifcation number to
use for the remainder of your studies at CCU.
Supplementary Materials
Unit Examination Answer Sheets*
Final Examination Scheduling Form
*Master of Education and Doctor of Education students will not
receive unit exam answer sheets. Unit Examinations for these
programs require written responses.
Your Course Grade
Your grades on course examinations are determined by the percentage
of correct answers. The University uses the following grading system:
A = 90% – 100% correct
B = 80% – 89% correct
C = 70% – 79% correct
D = 60% – 69% correct
F = 59% and below correct
Your grade in this course will be based on the number of points you
earn. Grades are based on the percentage of points you earned out of
a total of 500 points:
Four Unit Examinations
100 points each400 points total80% of your grade
Final Examination
100 points100 points total20% of your grade

Introduction to Financial Management

Mastering the Course Content
In order to successfully complete this course, we recommend that
you do the following before beginning:
• Be sure that you have the correct edition of the course
textbook. Check the ISBN number of your textbook with the
ISBN number listed on the cover page of this Study Guide.
• Review the Table of Contents at the end of this Syllabus.
You will only be responsible for the chapters in the textbook
that are listed in the Table of Contents.
Each Study Guide contains several components selected and
developed by the faculty to help you master the content of the
course. Each chapter in the Study Guide corresponds to a chapter in
the textbook. Study Guides vary depending on the course, but most
will include:
Learning Objectives
Self Tests
Key Terms
Critical Analysis Questions (Master and Doctoral
students only)
The most effcient way to complete this course is to read the
materials in both the Study Guide and textbook in the sequence in
which it appears, generally from beginning to end.
Read the Overviews and Summaries
Before reading a chapter of your textbook, review the corresponding
Learning Objectives, Overview, Key Terms and Summary sections in
the Study Guide. These were prepared to give you an overview of the
content to be learned.
Review the Self Test
After you have reviewed the Study Guide summaries, look at the
items on the Self Test. As you identify your areas of relative strength
and weakness, you will become more aware of the material you will
need to learn in greater depth.
Review the Critical Analysis (Master and Doctoral students only)
The Critical Analysis questions are designed to help you gain a deeper
understanding and appreciation for the course subject matter. This
section will encourage you to give additional thought to the topics
discussed in the chapter by presenting vignettes or cases with real
world relevance.

Introduction to Financial Management

Read and Review the Chapter
Once you have the scope and organization of the chapter in mind,
turn to the corresponding chapter in the text and read the material
carefully. Keep the Learning Objectives, Self Test and/or Critical
Analysis questions in mind as you read.
Highlight important concepts and information in your Study Guide
and write notes in the Study Guide margins as you read. These notes
will help you study for the Unit and Final Examinations.
Check Your Mastery of Each Chapter
When you feel that you have mastered the concepts presented in the
chapter, complete the Study Guide Self Test and/or Critical Analysis
questions without referring to the textbook or your notes. Correct your
Self Test and review each Critical Analysis response using the Answer
Key and Solutions Guide provided in the Study Guide. Your results
will help you identify any areas you need to review.
Unit Examinations
Each course contains four Unit Examinations and a Final
Examination. Unit Examinations usually consist of 25 objective
(multiple choice or true/false) test questions as well as
comprehensive writing assignments selected to reflect the
Learning Objectives identifed in each chapter. For Master of
Education and Doctor of Education students, Unit Examinations
consist of Written Assignments only. Unit Examinations may be found
approximately every four to six chapters throughout your Study Guide.
Unit Examinations are open-book, do not require a proctor, and are
not timed. This will allow you to proceed at your own pace.
It is recommended that you check your answers against the material
in your textbook for accuracy.
Written Assignments
Each Unit Examination includes a written component. This
assignment may be in the form of written questions or case study
problems. The written assignment affords the student an opportunity
to demonstrate a level of subject mastery beyond the objective Unit
Examinations, which reflects his/her ability to analyze, synthesize,
evaluate and apply his/her knowledge. The written assignment
materials are found immediately following each Unit Examination.

Introduction to Financial Management

Written Assignment Requirements
Always include your name, student number, course number,
course title and unit number on each page of your written
assignment (this is for your protection in case your materials
become separated).
Begin each written assignment by identifying the question
number you are answering followed by the actual question
itself (in bold type).
Use a standard essay format for responses to all questions
(i.e. an introduction, middle paragraphs and conclusion).
All responses must be typed double-spaced, using a
standard font (i.e. Times New Roman) and 12 point type
size for ease of reading and grading.
All online responses must be submitted as a MS Word
Document fle only.
Written assignments are judged on the quality of the response in
regard to the question. Word count is NOT one of the criteria that is
used in assigning points to written assignments. However, students
who are successful in earning the maximum number of points tend to
submit written assignments that fall in the following ranges:
Undergraduate courses: 350 – 500 words or 1 – 2 pages.
Graduate courses: 500 – 750 words or 2 – 3 pages.
Doctoral courses: 750 – 1000 words or 4 – 5 pages.
All work must be free of any form of plagiarism. Put written answers
into your own words. Do not simply cut and paste your answers from
the Internet and do not copy your answers from the textbook.
Plagiarism consists of taking and using the ideas, writings or
inventions of another, without giving credit to that person and
presenting it as one’s own. This is an offense that the University takes
very seriously. An example of a correctly prepared written response
may be found by visiting the Coast Connection student portal.
Citation Styles
The majority of your response should be your own original writing
based on what you have learned from the textbook. However, if you
choose to use outside material to answer a written assignment
question, be sure to provide a reference (or citation) for the
material. The following points are designed to help you understand
how to provide proper references for your work:

Introduction to Financial Management

References are listed in two places.
The frst reference is briefly listed within your answer. This
includes identifying information that directs the reader to
your List of References at the end of your Written
The second reference is at the end of your work in the List of
References section.
All references cited should provide enough identifying
information so that the reader can access the original
For more detailed information on the proper use of citations, please
refer to the Student Handbook.
Submitting Your Unit Examinations by Mail
Send your completed Unit Examination along with any written
assignments to the following mailing address:
California Coast University
Testing Department
925 N. Spurgeon Street
Santa Ana, CA 92701
Submitting Your Unit Examinations via the Internet
Students may access the online testing features via the Coast
Connection student portal. Multiple choice Unit Examinations may be
completed and submitted online. After logging in to your online
account at, select the Testing link, then
select Complete Unit Exam. It is recommended that you complete the
Unit Examinations on the hard copy answer sheet frst, then transfer
the answers to the online answer sheet.
The written assignments for each Unit Examination may be submitted
online as well. After accessing the student portal, choose the Writing
Assignment link and then select Writing Assignment Submission. If
you will be submitting multiple Word documents, please upload and
submit them one at a time.

Introduction to Financial Management

Repeating Examinations
After a Unit Examination grade has been posted, students have the
option of repeating the exam to improve their grade*. Each Unit
Examination may only be repeated once.
Students may retake one Unit Examination per course, free of charge.
The cost for each additional, repeated exam will be $90. Payment
must be paid in full to the Accounting Department prior to repeating
Requests to retake a Unit Examination will only be honored if the
Final Exam has NOT been sent.
*Master of Education and Doctor of Education students are not
eligible to retake Unit Exams. If you would like to improve your
grade, you may pay the current cost of tuition to retake the course.
Final Examination
Scheduling a Final Examination
Final Examination requests can be submitted via U.S. mail, online
through the Coast Connection student portal or by calling the Testing
Department at (714) 547-9625.
A Final Exam Scheduling Form is located on the last page of this
Study Guide. Please fll out all required felds and mail it to the
If you would like to put in a Final Exam request online, log in to your
student account at and choose the Testing
link, then select Final Exam Scheduling.
Final Exams will only be sent if you have completed all four Unit
Examinations and submitted all four Writing Assignments.
Submitting Your Final Examination
Final Examinations can be submitted by mail, fax or online through
the student portal.
After you have completed your exam, you or your proctor can fax it to
the Grading Department at (714) 547-1451 or mail it to the
University. When faxing exams, please do not resize your fax.
For online submissions, once you have logged into the student portal,
click on the Testing tab and then choose either Proctored Final or
Non Proctored Final. If your Final Exam was sent to your proctor, then
he or she will have to enter a password that was issued to them on
the Proctor Instruction Sheet for the course.

Introduction to Financial Management

The University requires that all Final Examinations except Associate
and Bachelors level elective courses be completed under the
supervision of a Proctor. At the time you enrolled into your program,
you were given the total number of proctored Final Examinations
required for your degree program.
The purpose of the proctored Final Examination is to verify that you
are, in fact, the person who is enrolled in the course of study. It is
also to verify that you are completing the Final Examination without
the aid of any outside assistance. During the proctored Final
Examination, you may use your textbook and any notes you have
taken during the completion of your Unit Examinations. Your
designated Proctor will verify your identity and that you have
completed the Final Examination without any outside assistance. A
Proctor can be anyone EXCEPT an immediate family member,
someone who resides with you or a current/former CCU student.
Receiving Your Examination Grades
After your examinations are scored, a grade report will be mailed to
you or you may arrange to have your grade e-mailed to you.
You may also check your grades on the Coast Connection student
portal. Grades are normally posted and available for review within 5
business days.
Most students receive their grades by regular mail within two weeks
after the University receives their examinations.
If you do not receive a grade report within two weeks, please contact
the Testing Department and a duplicate grade report will be sent to
Students from foreign countries: Allow 4–6 weeks to receive your
grade report by mail.
Your Overall Grade Point Average
In addition to receiving a passing grade for each course, all students
must maintain a required Overall Grade Point Average in order to
graduate. Undergraduate students need an Overall Grade Point
Average of 2.0 (C) on a 4.0 scale. Graduate and Doctoral students
need an Overall Grade Point Average of 3.0 (B) on a 4.0 scale.

Online Final Exam submissions must be completed in one session; you
can not save answers and go back to your exam later. We
recommend that you complete your Final Exam on paper frst, then
transfer the answers to your online answer sheet.
Introduction to Financial Management

A = 4 grade points
B = 3 grade points
C = 2 grade points
D = 1 grade point
F = 0 grade points
Students who do not meet the overall G.P.A. requirement by the end
of their program must pay the current cost of tuition to repeat courses
until they improve their overall G.P.A.
Overall course grades of “F” will be displayed on your Degree Plan
and count as 0 units completed. You must pay to retake these
Doctor of Education students must repeat any courses in which the
overall course grade is a “D” or “F”.
Be sure to keep a copy of all work you submit to the University.

Introduction to Financial Management

If you have any questions about how to proceed through the course or regarding any California Coast
University policies and procedures, the easiest way to get help is to e-mail or phone the University.
University offce hours are Monday through Friday from 8:30 a.m. to 4:00 p.m., Pacifc Standard Time.
California Coast University
925 N. Spurgeon Street, Santa Ana, California 92701
Phone: (714) 547-9625 • Fax: (714) 547-5777
Test Answer Sheet Fax Line: (714) 547-1451
Don’t forget: You are not alone! We are here to help you achieve your dream!

BAM 313
Introduction to Financial Management
Learning Objectives
The learning objectives for this course are listed below:
Chapter 1
• Identify the goal of the frm.
• Compare the various legal forms of business organization and explain why the corporate form of business is the most logical choice for a frm that is large or growing.
• Describe the corporate tax features that affect business decisions.
• Explain the ten principles that form the foundations of fnancial management.
• Explain what has led to the era of the multinational corporation.
Chapter 2
• Describe key components of the U.S. fnancial market system.
• Understand the role of the investment-banking business in the context of raising corporate capital.
• Distinguish between privately placed securities and publicly offered securities.
• Be acquainted with securities flotation costs and securities markets regulations.
• Understand the rate-of-return relationships among various classes of fnancing vehicles
that persist in the fnancial markets.
• Be acquainted with recent interest rate levels and the fundamentals of interest rate
• Explain the popular theories of the term structure of interest rates.
• Understand the relationships among the multinational frm, effcient fnancial markets,
and inter-country risk.
Chapter 3
• Compute a company’s profts, as reflected by its income statement.
• Determine a frm’s fnancial position at a point in time based on its balance sheet.
• Measure a company’s cash flows.
Chapter 4
• Explain the purpose and importance of fnancial analysis.
• Calculate and use a comprehensive set of measurements to evaluate a company’s
• Describe the limitations of fnancial ratio analysis.
Chapter 5
• Explain the mechanics of compounding, that is, how money grows over time when it is
• Be able to move money through time using time value of money tables, fnancial calculators, and spreadsheets.
Introduction to Financial Management
• Discuss the relationship between compounding and bringing the value of money back
to the present.
• Defne an ordinary annuity and calculate its compound or future value.
• Differentiate between an ordinary annuity and an annuity due and determine the future and present value of an annuity due.
• Explain loan amortization.
• Determine the future or present value of a sum when there are non-annual compounding periods.
• Determine the present value of an uneven stream of payments.
• Determine the present value of a perpetuity.
• Explain how the international setting complicates the time value of money.
Chapter 6
• Defne and measure the expected rate of return of an individual investment.
• Defne and measure the riskiness of an individual investment.
• Compare the historical relationship between risk and rates of return in the capital
• Explain how diversifying investments affects the riskiness and expected rate of return
of a portfolio or combination of assets.
• Explain the relationship between an investor’s required rate of return on an investment
and the riskiness of the investment.
Chapter 7
• Distinguish between different kinds of bonds.
• Explain the more popular features of bonds.
• Defne the term value as used for several different purposes.
• Explain the factors that determine value.
• Describe the basic process for valuing assets.
• Estimate the value of a bond.
• Compute a bondholder’s expected rate of return.
• Explain three important relationships that exist in bond valuation.
Chapter 8
• Identity the basic characteristics of preferred stock.
• Value preferred stock.
• Identify the basic characteristics of common stock.
• Value common stock.
• Calculate a stock’s expected rate of return.
Introduction to Financial Management
Chapter 9
• Discuss the diffculty encountered in fnding proftable projects in competitive markets
and the importance of the search.
• Determine whether a new project should be accepted or rejected using the payback
period, the net present value, the proftability index, and the internal rate of return.
• Explain how the capital-budgeting decision process changes when a dollar limit is
placed on the capital budget.
• Discuss the problems encountered in project ranking.
• Explain the importance of ethical considerations in capital-budgeting decisions.
• Discuss the trends in the use of different capital-budgeting criteria.
• Explain how foreign markets provide opportunities for fnding new capital-budgeting
Chapter 10
• Identify guidelines by which we measure cash flows.
• Explain how a project’s benefts and costs—that is, its free cash flows—are calculated.
• Explain the importance of options, or flexibility, in capital budgeting.
• Explain what the appropriate measure of risk is for capital-budgeting purposes.
• Determine the acceptability of a new project using the risk-adjusted discount method
of adjusting for risk.
• Explain the use of simulation for imitating the performance of a project under evaluation.
• Explain why a multinational frm faces a more diffcult time estimating cash flows
along with increased risks.
Chapter 11
• Describe the concepts underlying the frm’s cost of capital (technically, its weighted
average cost of capital) and the purpose for its calculation.
• Calculate the after-tax cost of debt, preferred stock, and common equity.
• Calculate a frm’s weighted average cost of capital.
• Describe the procedure used by PepsiCo to estimate the cost of capital for a multidivisional frm.
• Use the cost of capital to evaluate new investment opportunities.
• Compute the economic proft earned by the frm and use this quantity to calculate
incentive-based compensation.
• Calculate equivalent interest rates for different countries.
Chapter 12
• Understand the difference between business risk and fnancial risk.
• Use the technique of break-even analysis in a variety of analytical settings.
Introduction to Financial Management
• Distinguish among the fnancial concepts of operating leverage, fnancial leverage, and
combined leverage.
• Calculate the frm’s degree of operating leverage, fnancial leverage, and combined
• Understand the concept of an optimal capital structure.
• Explain the main underpinnings of capital structure theory.
• Understand and be able to graph the moderate position on capital structure importance.
• Incorporate the concepts of agency costs and free cash flow into a discussion on capital structure management.
• Use the basic tools of capital structure management.
• Understand how business risk and global sales impact the multinational frm.
Chapter 13
• Describe the trade-off between paying dividends and retaining the profts within the
• Explain the relationship between a corporation’s dividend policy and the market price
of its common stock.
• Describe practical considerations that may be important to the frm’s dividend policy.
• Distinguish among the types of dividend policies corporations frequently use.
• Specify the procedures a company follows in administering the dividend payment.
• Describe why and how a frm might pay non-cash dividends (stock dividends and stock
splits) instead of cash dividends.
• Explain the purpose and procedures related to stock repurchases.
• Understand the relationship between a policy of low dividend payments and international capital budgeting opportunities that confront the multinational frm.
Chapter 14
• Use the percent of sales method to forecast the fnancing requirements of a frm.
• Describe the limitations of the percent of sales forecast method.
• Prepare a cash budget and use it to evaluate the amount and timing of a frm’s fnancing needs.
Chapter 15
• Describe the risk–return trade-off involved in managing a frm’s working capital.
• Explain the determinants of net working capital.
• Calculate a frm’s cash conversion cycle and interpret its determinants.
• Calculate the effective cost of short-term credit.
• List and describe the basic sources of short-term credit.
• Describe the special problems encountered by multinational frms in managing working
Introduction to Financial Management
Robert S. Pindyck, Microeconomics, 6th Ed. Prentice Hall, 2005.
Peter N. Ireland, “Long-term Interest Rate and Inflation: A Fisherian Approach,” Federal Reserve
Bank of Richmond, Economic Quarterly, 82 (Winter 1996).
Richard Roll, The Behavior of Interest Rates: An Application of the Effcient Market Model to
U.S. Treasury Bills, New York: Basic Books, 1970.
J. R. Hicks, Value and Capital, London: Oxford University Press, 1946.
Jack and Suzy Welch, “How Healthy Is Your company?,” Business Week, May 8, 2006.
Peter Bernstein, Against the Gods: the Remarkable Story of Risk. John Wiley & Sons, Inc., New
York, 1996.
Ronald Fink, “Bondholder Backlash,” CFO Magazine, February 01, 2006.
John C. Kellecher and Justin J. MacCormack, “Internal Rate of Return: A Cautionary Tale,” McKinsey Quarterly, September 234, 2004.
John R. Graham and Campbell r. Harvey, “The theory and Practice of Corporate Finance: Evidence from the Field,” Journal of Financial Economics 60, 1-2 (May/June 2001).
Eugene F. Fama and Kenneth R. French, “Industry Costs of Equity,” Journal of Financial Economics 43 (1997).
W. Carl Kester and Timothy A. Luehrman, “What Makes You Think U.S. Capital Is So Expensive?”
Journal of Applied Corporate Finance (Summer 1992).
A. A. Berle, Jr., and G.C. Means, The Modern Corporation and Private Property, New York: Macmillan, 1932.
Edward I. Altman and Marti G. Subrahmanyam, eds., Recent Advances in Corporate Finance
(Homewood, IL: Irwin, 1985).
Joel M. Stern and Donald H. Chew, Jr., eds., The Revolution in corporate Finance (New York: Basil
Blackwell, 1986).
Suggested Readings
Introduction to Financial Management
Suggested Online Readings
Careers in Business
Financial Scandals html
Investopedia fnancial dictionary
Executive Pay Watch
Federal Reserve Statistical Releases
Inflation Indices
North American Industry Classifcation System
Find Bonds by name
Investing in preferred stock
Personal and Business fnance
Personal fnance calculators
Treasury Management Web site – Current yield information
Federal Reserve Bank of St. Louis
Table of Contents
Introduction to Financial Management

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