TABLE OF CONTENTS
Purpose and Perspective of the Chapter............................................................................ 2
Chapter Objectives ............................................................................................................... 2
Key Terms .............................................................................................................................. 2
What's New in This Chapter ................................................................................................ 3
Chapter Outline ..................................................................................................................... 3
Additional Discussion Questions ......................................................................................... 4
Additional Activities and Assignments ............................................................................... 5
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to introduce the discipline of finance. It begins with
the divisions of finance: financial institutions, investments, and business finance. This
is followed by key financial concepts of sources of finance: risk and return, financial
leverage, and valuation. The subsequent sections consider assumptions made in
finance and the relationship of finance to other business disciplines. This chapter
ends with the plan for the text, outlining both the parts and the chapters.
CHAPTER OBJECTIVES
The following is an outline of this chapter:
1.1 The divisions of finance.
1.2 Key financial concepts.
1.3 Assumptions.
1.4 Finance and other business disciplines.
1.5 Plan of the text.
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KEY TERMS
Assets: Items or property owned by a firm, household, or government and valued in
monetary terms.
Balance sheet: Financial statement that enumerates (as of a point in time) what an
economic unit owns and owes and its net worth.
Equity: Owners’ investment in a firm; a firm’s book value or net worth.
Financial leverage: Use of borrowed funds in return for agreeing to pay a fixed return;
use of debt financing.
Liabilities: What an economic unit owes, expressed in monetary terms.
Return: What is earned on an investment; the sum of income and capital gains
generated by an investment.
Risk: Possibility of loss; the uncertainty that the anticipated return will not be
achieved.
Valuation: Process of determining what an asset is currently worth.
WHAT'S NEW IN THIS CHAPTER
The following elements are improvements in this chapter from the previous edition:
• N/A
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CHAPTER OUTLINE
The following outline organizes activities (including any existing discussion questions
in PowerPoints or other supplements) and assessments by chapter (and therefore by
topic), so that you can see how all the content relates to the topics covered in the
text.
I. The Divisions of Finance (PPT 3)
a. Finance is generally divided into three areas: financial institutions,
investments, and business finance.
i. Financial institutions: Concerned with the institutional aspects
of the discipline, which encompass the creation of financial
assets, the markets for trading securities, and the regulation of
financial markets.
ii. Investments: Concerned with the analysis of individual assets
and the construction of well-diversified portfolios.
iii. Corporate or business finance: Emphasizes the role of the
financial manager.
II. Key Financial Concepts (PPT 4)
a. Sources of Finance
i. Sources and the assets that a firm owns are often summarized
in a financial statement called a balance sheet.
ii. A balance sheet enumerates at a moment in time what an
economic unit, such as a firm, owns, its assets; what it owes,
its liabilities; and the owners’ residual claim the firm, the
equity.
b. Risk and Return
i. Investments are made because the individual or management
anticipates earning a return.
ii. Sources of return are income and price appreciation
iii. Risk is the uncertainty that an expected return may not be
achieved.
c. Financial leverage
i. The use of borrowed funds.
d. Valuation
i. Determination of what an asset is currently worth.
ii. Goal of management: maximization of shareholder value.
III. Assumptions (PPT 8)
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