Assignment 1: Discussion Question The management of current assets and current liabilities in the short run can lead to several challenges for the financial manager.  What are some of the more common challenges or problems encountered by the firm in this regard, and what are the possible solutions?  Explain your answers. Assignment 2: Discussion Question Financial mangers make decisions today that will affect the firm in the future.  The dollars used for investment expenditures made today are different from the cash flows to be realized in the future.  What are these differences?  What are some of the techniques that can be used to adjust for these differences? Assignment 3: Discussion Question Valuation of a firm’s financial assets is said to be based on what is expected in the future, in terms of the future performance of the firm, the industry, and the economy.  What types of value would you consider when assigning “value” to a firm’s stock or bond?  What is the significance of each of the different types of value in the valuation process? Use examples to support your response. Assignment 4: Discussion Question The finance department of a large corporation has evaluated a possible capital project using the NPV method, the Payback Method, and the IRR method.  The analysts are puzzled, since the NPV indicated rejection, but the IRR and Payback methods both indicated acceptance. Explain why this conflicting situation might occur and what conclusions the analyst should accept, indicating the shortcomings and the advantages of each method.  Assuming the data is correct, which method will most likely provide the most accurate decisions and why? Course Overview (1 of 3) Defining Finance Broadly defined, finance is the study of how people manage scarce resources in general, and money and other financial resources in particular. There are two important features that distinguish financial decisions from other types of decisions. The benefits and costs of financial decisions are spread out over time and usually shrouded in uncertainty. These decisions are made in a financial environment that includes the financial system, institutions, markets, and participants such as individual households, businesses, and governments. It is important to note that a well developed and properly functioning financial system enables the economy to operate efficiently and contributes to the economic growth and development of the country. Brief History of Finance Finance emerged as a separate field of study in the U.S. in the early 1900s. At that time finance was taught primarily as a descriptive subject using anecdotes and rules of thumb. The focus at that time was on the formation of new firms, the various types of securities firms can issue to raise funds and the legal aspects of mergers and acquisitions.  This continued to be the focus all through the 1920s. However, during the 1930s the focus shifted to the study of bankruptcy and reorganization, corporate liqu ...

1. Assignment 1: Discussion Question
The management of current assets and current liabilities in the
short run can lead to several challenges for the financial
manager. What are some of the more common challenges or
problems encountered by the firm in this regard, and what are
the possible solutions? Explain your answers.
Assignment 2: Discussion Question
Financial mangers make decisions today that will affect the firm
in the future. The dollars used for investment expenditures
made today are different from the cash flows to be realized in
the future. What are these differences? What are some of the
techniques that can be used to adjust for these differences?
Assignment 3: Discussion Question
Valuation of a firm’s financial assets is said to be based on
what is expected in the future, in terms of the future
performance of the firm, the industry, and the economy. What
types of value would you consider when assigning “value” to a
firm’s stock or bond? What is the significance of each of the
different types of value in the valuation process? Use examples
to support your response.
Assignment 4: Discussion Question
The finance department of a large corporation has evaluated a
possible capital project using the NPV method, the Payback
Method, and the IRR method. The analysts are puzzled, since
the NPV indicated rejection, but the IRR and Payback methods
both indicated acceptance. Explain why this conflicting
situation might occur and what conclusions the analyst should
accept, indicating the shortcomings and the advantages of each
method. Assuming the data is correct, which method will most
likely provide the most accurate decisions and why?
Course Overview (1 of 3)

2. Defining Finance
Broadly defined, finance is the study of how people manage
scarce resources in general, and money and other financial
resources in particular. There are two important features that
distinguish financial decisions from other types of decisions.
The benefits and costs of financial decisions are spread out over
time and usually shrouded in uncertainty.
These decisions are made in a financial environment that
includes the financial system, institutions, markets, and
participants such as individual households, businesses, and
governments. It is important to note that a well developed and
properly functioning financial system enables the economy to
operate efficiently and contributes to the economic growth and
development of the country.
Brief History of Finance
Finance emerged as a separate field of study in the U.S. in the
early 1900s. At that time finance was taught primarily as a
descriptive subject using anecdotes and rules of thumb. The
focus at that time was on the formation of new firms, the
various types of securities firms can issue to raise funds and the
legal aspects of mergers and acquisitions. This continued to be
the focus all through the 1920s.
However, during the 1930s the focus shifted to the study of
bankruptcy and reorganization, corporate liquidity, and
regulation of securities markets because of the Great
Depression. During the depression era, there were an
unprecedented number of business failures, which resulted in
high unemployment rates and economic decline in the country.
During the 1940s and early 1950s, finance continued to be
taught as a descriptive subject.
Course Overview (2 of 3)

3. With the development of the portfolio theory by Harry
Markowitz in 1952, finance started to become more
quantitative. The evolution of the subject accelerated during the
late 1950s and 1960s with the development of the Modigliani-
Miller Theorems, the Capital Market Theory, and the Capital
Asset Pricing Model. This era is generally considered the birth
of modern finance, from which evolved many of the decision-
making techniques used today.
During the 1970s the Option Pricing Model was developed. This
is considered the most important development in finance. As a
result of these developments, the emphasis of finance shifted to
decisions regarding the choice of assets and liabilities to
maximize the firm's value. The late 1970s and 1980s saw
increased globalization of business and finance. Firms
discovered innovative ways to manage risks and finance
operations.
During the 1990s finance continued to evolve amidst fast-paced
technological developments. Innovations in information
technology led to a dramatic increase in online trading and
online banking. These developments further increased the
importance of global markets and global finance.
The most important trends in the new millennium include the
following:
· Continued globalization of business
· Increase in the use of information technology
· The regulatory attitude of the government
As a result of these developments, finance today is a well-
developed coherent body of professional knowledge that
continues to evolve using scientific methods.
Role of Finance in the Economy (1 of 2)
Economy refers to an organized system of production,

4. distribution, and consumption of goods and services within the
socio-economic system of a country.
Economics is the study of the economy of a society. Economics
involves the study of resource allocation such as labor, capital,
and natural resources, how income that is generated in the
production and sale of goods and services is distributed among
people, and how people allocate their income through spending,
saving, borrowing, and lending decisions.
Economics can be divided into two branches—
microeconomics andmacroeconomics. The former involves the
study of causes and consequences of individual decision-making
units such as households and business firms in a market. The
latter involves the study of the causes and effects of decisions
made by all firms and households in markets.
Finance is the study of various financial or monetary aspects of
decisions made by the individuals and firms, governments, and
other organizations. These decisions are generally about
production, spending, saving, borrowing, and lending. Generally
finance involves the study of how individuals, firms,
governments, and foreign investors raise and use money.
Why Study Finance?
There are several reasons to study finance:
· You might be interested in a career in finance
(visit www.monster.com andwww.efinancialcareers.com). There
are many potentially rewarding jobs in the field of finance and
many possible career paths for finance professionals.
· Basic knowledge of finance enables you to efficiently manage
your resources. When you decide to seek advice from
professionals such as bankers, stockbrokers, insurance brokers,
or financial advisors, you will be better able to evaluate the
advice.
· As a citizen of the USA or another country, you should make
informed financial, economic, and political decisions.
Regardless of your financial and economic goals, you need to be
an informed participant in economic and political processes.
The study of finance will provide a conceptual framework for

5. making such informed decisions.
· Knowledge of finance is essential in the business world. Even
if your interests lie in a field other than finance, you need to
have a sound understanding of the concepts, techniques, and
terminology used by finance professionals. This helps you
communicate and understand the concepts in your field of study.
· On an intellectual level, finance can be an interesting field of
study. It enhances your understanding of how the real world
works.
Role of Finance in the Economy (2 of 2)
The study of finance is broadly divided into three inter-related
areas: financial institutions and markets, investments, and
financial management.
The study of financial institutions involves learning how banks,
thrifts, finance companies, and the Federal Reserve
Bank facilitate financial transactions through the transfer of
funds from surplus units to deficit units for investment
purposes.
The study of investments involves learning how to increase
wealth and assets in the future using available funds. The
investment landscape has changed dramatically in the last 20
years and offers numerous options today.
Financial management is also referred to as business finance or
corporate finance. It is the study of how businesses evaluate
long-term projects for investment. Financial management also
involves the study of how businesses acquire funds, and
analysis of a firm's performance.
Types of Financial Decisions
Households and businesses make various types of financial
decisions.
Financial Decisions Made in Households:
· Consumption and savings decisions: How much of the current
wealth should households spend on consumption and how much

6. of their current income should they save for the future? For
example should they eat out or save and invest in an individual
retirement arrangements (IRA) account?
· Investment decisions: How should households invest the
money they have saved? For example should they invest the
funds in an IRA account, stock fund, or bond fund?
· Financing decisions: When and how should households borrow
money to implement their consumption and investment plans?
Consider that you want to buy a new car. The dealership offers
a loan. Your credit union is also willing to provide a loan.
Which one would you select?
· Risk management decisions: How and on what terms should
households seek to reduce financial uncertainties? For example
what type of auto insurance should they buy for their cars?
Should they buy a service warranty?
Overview of the U.S. Financial System (1 of 5)
The Financial System
A financial system is a complex network of government and
policy makers, the monetary system, financial institutions, and
financial markets, which interact to facilitate the flow of funds
in the economy.
· An effective financial system should have policy makers who
pass laws and make decisions relating to fiscal and monetary
policies. The policy makers are the president, Congress, the
U.S. Treasury, and the Federal Reserve Board.
· An effective financial system needs an efficient monetary
system to create and transfer money.
· An effective financial system requires financial institutions
that facilitate capital formation through the savings-investment
process. This process refers to the flow of funds from savers to
investments in physical assets or to financial institutions and
businesses, which in turn invest in physical assets.

7. · An effective financial system should have financial markets
that facilitate the transfer of financial assets among individuals,
institutions, businesses, and the government.
Individuals are the primary investors in an economy. Ultimately
they own all the business assets. Individuals invest in the
financial system with the expectation of converting them to
savings in the future. (A basic axiom of finance is that the
ultimate function of the system is to satisfy individuals'
consumption preferences, including the basic necessities of
life.
Organizations such as firm
Overview of the U.S. Financial System (2 of 5)
When you study transactions in isolation, note that individuals,
businesses, and the government can be lenders at times and
borrowers at some other times. Businesses and the government
often have temporary surplus funds to invest. Across the
economy, or in aggregate, businesses and the government are
net borrowers. Similarly individuals are sometimes borrowers
but, in aggregate, they are net lenders. Individuals in aggregate
are the source of investment funds.
The monetary system should provide an efficient medium to
exchange goods and services. Its value should remain
reasonably stable and it should be convenient to use. The
monetary system should create and transfer money across the
economy.
The financial system should enable the creation of productive
capital that is sufficient to meet the demands of the economy. In
a well-developed economy productive capital formation occurs
indirectly. For example individuals save their money in bank
accounts. Banks pool these funds and loan it to businesses.
Businesses invest these funds in buildings and machinery
thereby creating productive capital.
Financial markets are necessary for productive capital formation

8. and efficient allocation of capital. They enable investors to
transfer financial assets such as stocks and bonds, and convert
them to cash when required.
s and the government exist in order to facilitate the achievement
of this ultimate function.)
The financial system plays an important role in an individual's
financial life cycle.
Initially intermediaries and markets play a role, directly or
indirectly, when there's a need to borrow. For example you deal
with the mortgage market directly or indirectly when you
borrow money to buy your first home. Similarly you deal with
banks and other financial institutions in various ways and for
various reasons.
Overview of the U.S. Financial System (3 of 5)
Types of Financial Institutions
Financial institutions and categories
Primary sources of funds
Depository institutions
Commercial banks
individual savings
Savings and loan associations
individual savings
Savings banks
individual savings
Credit unions
individual savings
Contractual savings organizations
Pension funds
employee/employer contributions
Insurance companies
premium paid on policies
Securities firms
Investment companies (mutual funds)

9. individual savings
Investment banking firms
other financial institutions
Brokerage firms
other financial institutions
Finance firms
Finance companies
other financial institutions
Mortgage banking firms
other financial institutions
Financial Institutions in the U.S. have evolved to meet the
needs of individuals and organizations. The main function of
these institutions is financial intermediation.Financial
intermediation is the process in which individual savings are
pooled in financial institutions, and are then lent or invested.
There are four categories of financial institutions: depository
institutions, contractual savings organizations, securities firms,
and finance firms.
Commercial banks are the most important of the depository
institutions. Commercial banks primarily accept deposits and
extend loans for business.
They offer a wide range of products and services for individuals
and businesses such as deposit accounts, credit services,
payment and collection services, trade services, foreign
exchange services, fiduciary services, credit enhancement or
payment guarantees, consulting services, and risk management
services.
The enactment of the Gramm-Leach-Bliley Act of 1999 further
strengthened commercial bank activities.
(http://banking.senate.gov/conf/grmleach.htm)
Overview of the U.S. Financial System (4 of 5)

10. Types of Securities
Real assets are direct ownership of land, buildings, equipment,
and inventories. Financial assets are debt instruments, equity
securities, and other financial contracts that are backed by real
assets. Relatively few financial assets are traded in the market,
for example checkable deposits. The following table provides a
list of commonly traded securities in the financial markets.
Securities Markets Categories
Issuers
Money markets
Treasury bills
U.S. government
Negotiable certificates of deposits
commercial banks
Commercial paper
corporations
Capital markets
Treasury bonds
U.S. government
Municipal bonds
state/local governments
Corporate bonds
corporations
Corporate stocks
corporations
Besides these securities there is also an active market for
international securities such as Eurobonds, foreign bonds,
and American Depository Receipts(ADRs). Many foreign
companies have also listed their stocks on National Association
of Securities Dealers Automated Quotations (NASDAQ).
Functions of the U.S. Financial System
The functional view of the U.S. financial system is more stable
than the institutional view. Institutions evolve with the
changing needs of the economy, but the functions of the
financial system should be fulfilled, regardless of the type of

11. institution that performs the function.
Overview of the U.S. Financial System (5 of 5)
The U.S. Monetary System
The U.S. monetary system comprises the Federal Reserve
System and thebanking system. Both together control the money
supply in the U.S. economy. The Federal Reserve System,
through the Board of Governors and the Federal Reserve Banks,
defines and regulates the money supply and facilitates the
transfer of money through check processing and clearing.
The banking system, through depository institutions, creates and
transfers money by financial intermediation and by processing
and clearing checks subject to Federal Reserve guidelines. The
banking system can create deposit money by lending excess
reserves as a result of the fractional reserve requirement. As
long as the deposit money is funneled back in the banking
system, more deposit money can be created.
Theoretically, the amount of deposit money that can be created
is equal to deposits (D) divided by the reserve requirement (RR)
or D/RR. For example, a $1,000 deposit with a reserve
requirement of 20% can create $5,000 of deposit money.
Foundations of Financial MGMT
Author:
Block, Stanley|Hirt, Geoffrey

12. Edition / Copyright:
13th
Publisher:
Mcgraw-Hill
Module 1 Readings
Complete the following readings before starting work on the
assignments:
· Module 1 online lectures
· The following chapters from the textbook Foundations of
financial management:
· The goals and functions of financial management
· Review of accounting
· Financial Analysis
· Financial Forecasting
·