CSU Introduction to Finance Book 16th Edition Questions Discussion Note: I have attached the study guide. Listed below is the course book which is necessar

CSU Introduction to Finance Book 16th Edition Questions Discussion Note: I have attached the study guide. Listed below is the course book which is necessary to properly answer the questions.

Introduction to Finance: Markets, Investments, and Financial Management, Enhanced eText, 16th Edition

Author: Ronald W. Melicher; Edgar A. Norton
VBID: 9781119321118

Discuss the 2007-2008 financial crisis and what impact it had on the financial markets. Who was impacted? What caused the crisis, and how can a future crisis be prevented? Explain.

Your response must be at least 200 words in length.

What is finance? Briefly discuss how the study of finance is essential to business today. There are other areas of business, such as marketing, human resources, and management. How does finance impact them? In other words, can a business efficiently run without everyone having some knowledge of the field? Explain.

Your response must be at least 200 words in length.

Assume you are starting a new business such as a restaurant, barber shop, or spa, for example, and discuss the types of information you would access and research to get the business started. For instance, would you look at the local Small Business Administration’s website for guidance on how to fund and setup a new firm? What financial tools would be useful, and how would they assist you in the startup process? Explain.

Your response must be at least 200 words in length.

Your boss has asked you to put together an informal outline/presentation on the risk-return tradeoff. In your own words, discuss the tradeoff. Does a risky investment always equal a big payoff and vice versa? What does it mean to be a risk-averse versus a risk-taker? What types of information must be considered when it comes to risk and return? Explain.

Your response must be at least 200 words in length. 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.
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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 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

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
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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 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

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.
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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

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 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_after_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
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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=5b8d3631
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

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!
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