course material

1. (Mt) – Disscusion Board
UNIT I STUDY GUIDE The Financial Environment Course Learning Outcomes for Unit I Upon
completion of this unit, students should be able to: 1. Explain foundational finance theories.
1.1 Discuss the meaning of finance and how it affects the business environment. 1.2 Explain
the trade-off between risk and return. 1.3 Analyze a recent financial crisis to include why it
occurred and how it could have been prevented. 2. Analyze a financial forecast using
relevant data. 2.1 Explore the use of forecasts and financial tools for planning. Course/Unit
Learning Outcomes 1.1 1.2 1.3 2.1 Learning Activity Unit Lesson Chapter 1 Unit I
Assessment Unit Lesson Chapter 1 Unit I Assessment Unit Lesson Chapter 1 Unit I
Assessment Unit Lesson Chapter 1 Chapter 2 Unit I Assessment Required Unit Resources
Chapter 1: The Financial Environment Chapter 2: Money and the Monetary System Unit
Lesson Welcome to the course! In this first unit, we will focus on the basics of the financial
environment as well as the monetary system. While most of us are impacted by finance
every day, very few of us realize how important it is to understand and appreciate this field
of business. The material in this unit concentrates on the six principles of finance in addition
to creating an overview of the financial system. Each of the principles will be explored as we
focus on their contributions to not only the field of business but to the marketplace. BBA
3301, Financial Management 1 Time Value of Money UNIT x STUDY GUIDE Title Higher risk
The first principle of finance is the time value of Money has a time money. Yes, this is a
broad concept, but the time should lead to value value of money simply means a dollar
received higher returns today is more valuable than a dollar received one year from now.
This is because we can invest the dollar we have today to earn interest so that at the end of
one year, we will have more than one dollar. In other words, money has time value. For
Diversification Markets are instance, suppose you have a choice of receiving reduces risk
efficient in pricing $1,000 either today or one year from today. If you decide to receive it a
year from now, you will have passed up the opportunity to earn a year’s interest on the
money. In other words, you would have suffered an opportunity loss/cost. The cost
Managers and is the interest you could have earned on the Reputation stockholders may
$1,000 if you invested it for one year. The only way to combat the time value of money is to
have different matters invest the money into securities, savings, etc. priorities There are
many external factors that influence the value of money including inflation, political The six
principles of finance and economic factors, the cost of living, Gross (Melicher & Norton,
2017) Domestic Product (GDP), and the strength or weakness of the currency. We will visit
the time value of money concept throughout the course as we utilize methods such as the

2. Net Present Value (NPV) method to evaluate investments. This short video is a great review
of the time value of money concept. The video explores how the concept functions and who
is impacted. Wall Street Survivor. (2015, July 28). Time value of money [Video file].
Retrieved from https://www.youtube.com/watch?v=1CO5hf2ns18 When we think about
the time value of money, we focus on the measurement of value. To measure value, we use
the concept of time value of money to bring the future benefits and costs of a project,
measured by its cash flows, back to the present. Then, if the benefits or inflow of cash is
greater than the costs, the project is beneficial and should be taken on. If, on the other hand,
the benefits or inflow of cash is outweighed by the costs, the project is not a good choice for
the organization. If the time value of money is not recognized, there is no way that projects
can be evaluated in a meaningful way. We will learn more about the time value of money in
Unit IV. Risk and Return One has to consider the tradeoff that exists between risk and
return. With so many investment opportunities available, one has to consider not only the
risk involved but also the return that is expected on the investment. Why would you make
an investment that would not at least pay you something for delaying consumption? You
would not, even if there is no risk. In fact, investors will want to receive at least the same
return that is available for risk-free investments, such as the rate of return being earned on
U.S. government securities. While no one likes to face risk, it is part of doing business. Risky
investments are less attractive unless they offer the likelihood of higher returns. Thus, the
more unsure people are about how an investment will perform, the higher the return they
will demand for making the investment. So, if you are trying to persuade investors to put
money into a risky venture you are pursuing, then you will have to offer a higher expected
rate of return to lure them in. Keep in mind that expected rate of return and actual return
are not the same thing. As an investor, you have expectations about what returns you will
earn. However, you will not know for certain what they return will be. For instance, if
investors could have seen into the future, no one would have bought stock in the women’s
retailer Ann Taylor Stores in 2009. In March of 2009, the company announced a larger-
than-expected fourth BBA 3301, Financial Management 2 quarter loss. The result was that,
within minutes of the announcement, the firm’s stock price dropped UNIT x STUDY GUIDE a
staggering 38% (Cheng, 2009). Title Diversification Diversification is another key point to
consider. This concept simply means that you do not invest all of your money into one
account. Instead, you spread out the investment across multiple investments such as mutual
funds, stock, bonds, or certificates of deposit (CDs). When you diversify, you divide your
money into multiple investments. (Nexusby, n.d.) Assume you invested in two stocks, Apple
and Sears. Ten years after your investment, you decide to check on how your investments
are doing. You bought Apple stock for $10 and the stock is now trading at almost $45. Then,
you look at the Sears stock and see that the stock is selling at $5 but you paid $25 per share.
Clearly, the Apple stock is performing better. The stock value changed over time due to
operations, performance, and market trends, among other things. Ideally, you would have
invested all the funds in the Apple stock, but the uncertainty of how the stock would do is
part of the inherent risk in investing. We are risk averse! We would like to reduce the risk
associated with our investment portfolio without having to accept lower expected returns.
Thank goodness for diversification because that is the best way of managing risk! Take a

3. few minutes to view the short video below. It summarizes risk diversification and explores
its significance. Fidelity Investments. (2015, December 4). What’s diversification [Video
file]. Retrieved from https://www.youtube.com/watch?v=LU8tubkz_Fg Market Efficiency
An efficient market is one in which the prices of assets traded fully reflect the value based
on everything known at the time. Whether a security market such as the National
Association of Securities Dealers Automated Quotations (NASDAQ) is efficient depends on
the speed with which newly released information impacts prices. In other words, an
efficient stock market is characterized by a large number of profit-driven individuals who
act quickly by buying/selling shares of stock based on new information. For instance, while
Nike CEO William Perez flew aboard the company’s Gulfstream one day in November 2005,
traders on the ground sold off a major amount of Nike’s stock. Why? Because the plane’s
landing gear was malfunctioning, and they were watching TV coverage of the event as it was
happening! Before the CEO landed safely, Nike’s stock dropped by almost 2% (Cain, 2005).
Once Perez’s plane landed, Nike’s stock price bounced back. This example illustrates just
how time-sensitive trading and valuation can be. Management Versus Owner Perspectives
Another principle to study is the conflict of interest between management and the owners.
Managers might have goals that are different than the owners, and these goals might lead to
decisions that decrease the overall value of the firm. When it happens, it is mainly because
the manager’s own interest is best served by ignoring shareholder interests. Thus, there is a
conflict of interest between what is best for the managers and the stockholders. For
instance, it may be the case that shutting down an unprofitable plan is in the best interests
of the firm’s stockholders, but in doing so, the managers will find themselves out of a job or
having to transfer to a different job. This conflict of interest could lead the management of
the plant to continue running the plant at a loss. BBA 3301, Financial Management 3
Further, managers might decide to avoid projects that have risk associated with them, even
if GUIDE they are great UNIT x STUDY projects with huge potential returns and a small
chance of failure. Why is this?Title Well, if the project does not turn out to be successful,
these agents of the shareholders may lose their jobs. The costs associated with this conflict
can percolate into the marketplace. If the market feels management is damaging
shareholder wealth, there may be a positive reaction in stock price to the removal of that
management. For instance, on the announcement of the death of Roy Farmer, the CEO of
Farmer Brothers, a seller of coffee products, Farmer Brothers’ stock price rose about 28%
(Hirsch, 2004). Generally, a loss of a company’s top executive raises concerns over
leadership, causing the stock to drop. However, in the case of Farmer Brothers, investors
thought a change in management would have a positive impact on the future of the
company. Take a look at this 4-minute video that summarizes the concept of agency
problems within an organization. It discusses how the goals of the agency can create conflict
with the owners using examples: KnowledgEquity. (2016, March 16). Agency theory [Video
file]. Retrieved from https://www.youtube.com/watch?v=hi93–8jnpk Reputation Matters
Finally, we evaluate the sixth principle: importance of reputation within an organization
and how it translates into the marketplace. Much of this principle has to do with the
company’s ability to perform and function using a high level of ethics. When investors
evaluate potential areas of investment, they consider not only the ability of a firm to make

4. profits, but also the ability of a firm to sustain those level of profits into the future. Much of
that success draws on how the firm is perceived based on its history of giving, strong moral
code, and relationship with the public and consumers. For instance, when the Enron and
WorldCom scandals were exposed, no one wanted to take responsibility for what happened,
and the public washed its hands of the firms in terms of support. These days, consumers
and investors look for firms and investments that are in demand based on how they are
perceived, such as the way Whole Foods supports and nurtures programs that incorporate
free trade programs with other countries or how Ben & Jerry’s gives back much of its profits
to grass roots organizations, such as the Vermont Community Action Team Grant Program.
This program focuses on those communities dealing with extreme poverty. Overall, these
Six Principles of Finance not only provide a framework within which finance is based, but
they incorporate all of the core areas of the field from conflict to profit on one end of the
spectrum to social responsibility and risk and reward on the other end. By understanding
these basic building blocks of finance, we can start to focus on the details of how each
principle impacts the financial environment. References Cain, B. (2005). Nike CEO, other
executives safely on ground after landing-gear scare. Retrieved from
http://www2.ljworld.com/news/2005/nov/22/nike_ceo_other_executives_safely_ground_a
fter_land/ Cheng, A. (2009). Ann Taylor posts fourth straight loss. Retrieved from
https://www.marketwatch.com/story/ann-taylor-swings-to-loss-on-slumping-sales-2009-
08-21-83400 Hirsch, J. (2004). Roy F. Farmer, 87: Built family coffee company. Retrieved
from http://articles.latimes.com/2004/mar/17/local/me-farmer17 Melicher, R. W., &
Norton, E. A. (2017). Introduction to finance: Markets, investments, and financial
management (16th ed.). Hoboken, NJ: John Wiley & Sons, Inc. Nexusby. (n.d.). ID 141216841
[Image]. Retrieved from https://www.dreamstime.com/diversificationdiversified-portfolio-
revenue-split-diversification-diversified-portfolio-revenue-split-image141216841 BBA
3301, Financial Management 4 Suggested Unit Resources UNIT x STUDY GUIDE Title In
order to access the following resources, click the links below. The article below relates
events from the past to concepts covered in this unit including risk and diversification.
Taking a few minutes to read it will help to make the connection between these concepts
and the real world. Habal, H. (2001). Play it safe in a risky financial environment. Dallas
Business Journal, 25(6), 24. Retrieved from
http://link.galegroup.com/apps/doc/A78903566/ITOF?u=oran95108&sid=ITOF&xid=5b8
d3631 The following video is a great overview of risk and reward. If you are interested in
learning more about this topic, take a few minutes to view this video. Khan Academy.
(2011). Risk and reward introduction [Video file]. Retrieved from
https://www.youtube.com/watch?v=mv5zucjq60k Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do
not have to submit them. If you have questions, contact your instructor for further guidance
and information. How well do you know the unit material? Take the Unit I Knowledge Check
Quiz to find out! BBA 3301, Financial Management 5