15.
1 Risk and Return to an Individual Asset 450
15.2 Risk and Return to Multiple Assets 458
15.3 The Capital Asset Pricing Model (CAPM) 461
15.4 Applications in Performance Measurement 465
15.5 Using Excel to Make Investment Decisions 467
Summary 472
Key Terms 472
CFA Institute 473
Multiple Choice 473
Review Questions 474
Problems 475
Video Activity 476
16 How Companies Think about Investing 479
Why It Matters 479
16.1 Payback Period Method 480
16.2 Net Present Value (NPV) Method 482
16.3 Internal Rate of Return (IRR) Method 486
16.4 Alternative Methods 488
16.5 Choosing between Projects 490
16.6 Using Excel to Make Company Investment Decisions 496
Summary 501
Key Terms 501
CFA Institute 502
Multiple Choice 502
Review Questions 503
Problems 503
Video Activity 504
17 How Firms Raise Capital 507
Why It Matters 507
17.1 The Concept of Capital Structure 508
17.2 The Costs of Debt and Equity Capital 509
17.3 Calculating the Weighted Average Cost of Capital 512
17.4 Capital Structure Choices 516
17.5 Optimal Capital Structure 520
17.6 Alternative Sources of Funds 523
Summary 529
Key Terms 529
CFA Institute 530
Multiple Choice 530
Review Questions 532
Problems 532
Video Activity 533
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18 Financial Forecasting 535
Why It Matters 535
18.1 The Importance of Forecasting 536
18.2 Forecasting Sales 541
18.3 Pro Forma Financials 544
18.4 Generating the Complete Forecast 546
18.5 Forecasting Cash Flow and Assessing the Value of Growth 550
18.6 Using Excel to Create the Long-Term Forecast 554
Summary 559
Key Terms 559
Multiple Choice 560
Review Questions 561
Problems 562
Video Activity 563
19 The Importance of Trade Credit and Working Capital in Planning 565
Why It Matters 565
19.1 What Is Working Capital? 566
19.2 What Is Trade Credit? 575
19.3 Cash Management 577
19.4 Receivables Management 579
19.5 Inventory Management 583
19.6 Using Excel to Create the Short-Term Plan 584
Summary 590
Key Terms 590
Multiple Choice 592
Review Questions 594
Video Activity 597
20 Risk Management and the Financial Manager 599
Why It Matters 599
20.1 The Importance of Risk Management 600
20.2 Commodity Price Risk 602
20.3 Exchange Rates and Risk 604
20.4 Interest Rate Risk 614
Summary 618
Key Terms 618
CFA Institute 619
Multiple Choice 619
Review Questions 621
Problems 621
Video Activity 622
Index 623
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Preface 1
Preface
About OpenStax
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Customization
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Errata
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you will also find a list of past errata changes on your book page on [Link].
Format
You can access this textbook for free in web view or PDF through [Link], and for a low cost in print.
About Principles of Finance
Summary
Principles of Finance is targeted at the core finance course for undergraduate business majors. The book is
designed for conceptual accessibility to students who are relatively early in their business curriculum (such as
second-year students), yet it is also suitable for more advanced students. Due to the wide range of audiences
and course approaches, the book is designed to be as flexible as possible. Its modular structure allows the
introduction and review of content from prerequisite subjects in financial accounting, statistics, and
2 Preface
economics, depending on student preparation. It provides a solid grounding in the core concepts of financial
theory so that business students interested in a major or minor in finance will also be prepared for more
rigorous upper-level courses. Concepts are further reinforced through applicable connections and practical
calculation techniques for more detailed and realistic company scenarios from various industries.
Pedagogical Foundation
Principles of Finance emphasizes financial concepts relevant to people working in a variety of business
functions. To illuminate the meaningful applications and implications of financial ideas, the book incorporates
a unique use-case approach, providing connections among topics, solutions, and real-world problems. This
multifaceted framework drives the integration of concepts while maintaining a modular chapter structure.
Theoretical and practical aspects are presented in a balanced manner, and select ethical considerations are
introduced, particularly in the context of corporate governance.
In order to create meaning for all students, Principles of Finance exposes them to a range of companies,
industries, and scenarios reflecting different contexts. Examples of large companies such as Apple, Peloton,
and American Airlines are balanced with small businesses—coffee shops, clothing stores, and salons—that
may be more aligned with student experiences. The text includes authentic narratives from corporate finance,
small business, and personal finance to drive relevance and interest of the discipline. Profiles and interviews
include diverse figures in finance, such as Carlos Slim, Irina Simmons, Janet Yellen, and Ben Bernanke.
Problems and exercises have been carefully constructed to place students into a range of settings and
contexts as they develop knowledge and put it into practice. Finally, to reflect very recent experiences, the
authors have incorporated several discussions regarding the COVID-19 pandemic and its impact on people
and businesses.
Throughout, there is an emphasis on data use in business decision-making, with integrative sections on the
importance and analysis of financial, economic, and statistical data. Data types include FRED
([Link] economic data, company financial statements, and stock prices.
Practical techniques and calculation examples for data analysis with financial calculators (the Texas
Instruments BA II Plus™ Professional model is used as the basis for example illustrations) and/or spreadsheets
are included for relevant topics. For key chapters, downloadable Microsoft® Excel® data files are available for
student reference. This technical feature provides students with access to the Excel data files used in the
chapter examples for time value of money (Chapters 7, 8, 9) and statistics (Chapters 14, 15, 16) problems. The
downloadable files for the chapters covering financial forecasting and trade credit (18 and 19) allow students
to see how changing assumptions and variables impact financial decision-making. Chapters 13 and 14
(statistical and regression analysis, respectively) also include brief sections about the R software
([Link] package to promote further interest in trends in data science.
Teaching Plan Options
Principles of Finance includes chapters on basic, applied, and integrative finance topics as well as key concepts
from prerequisite financial accounting, quantitative methods (statistics), and economics courses. The chapters
on prerequisite topics highlight examples relevant to finance students. For instructors with a limited one-
semester schedule or whose students have solid knowledge of prerequisite disciplines, we recommend
focusing on the “core” chapters, as indicated in the following table of contents:
1 Introduction to Finance Core
2 Corporate Structure and Governance Core
3 Economic Foundations: Money and Rates Extension
4 Accrual Accounting Process Extension
Table 1
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