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THE CHALLENGE
The prospect of taking the Introductory Finance course is daunting to some students. Maybe this is because students often have the mistaken belief that the introductory finance course requires an understanding of high-level mathematics and is irrelevant to their career plans. Also, some students mistakenly believe finance is an area in which they will not need competency. Finance concepts often seem far removed from daily life. In spite of this, almost every major in a college of business, and many majors in other colleges, require the principles of finance course. As a result, many of the students who find themselves sitting in finance class on the first day of the semester do not want to be there.
We do not believe that this needs to be the case. Finance is important, dynamic, interesting, and fun. The challenge we take head-on in Financial Management: Principles and Practice is to convince students of this. In order to learn, students must want to learn. If they can see the usefulness of what is presented to them they will work hard and they will learn.
Our many years of teaching experience have taught us that the introductory financial management course can be one that students enjoy and that they see as having added considerable value to their educational experiences. Finance is, after all, central to any business entity. More CEOs have come up through the finance ranks than any other discipline. Students need to know that the principles and practices of financial management apply to any business unit from the very large multinational corporation to the very smallest proprietorship, even the family. Financial ratios tell a story; they are not numbers to be calculated as an end unto themselves. Risk is important and can be managed. Time value of money has meaning and is understood as the central tool of valuation. Funds have a cost and different sources of funds have different costs. Financial performance and condition can be assessed. Amortized loan payments, rates of return on investment, future value of investment programs, present value of payments to be received from bonds and stocks can be calculated. The opportunities and special challenges of international operations can be understood.
OUR APPROACH
We believe that students should walk out of the room after taking the final exam for a finance course believing that they have learned something useful. They should see a direct benefit to themselves personally, rather than just the belief that some set of necessary job skills has been mastered.
In writing the first edition of Financial Management: Principles and Practice, our author mandate was to always write from a perspective with the student in mind. We consider students to be our real customers. They are the ones who must be inspired to learn and gain a working facility with the subject. For this reason our examples have been carefully chosen to focus on organizations, topics, and people with which students are familiar. With the second edition, we have further enhanced our goal of student understanding with the addition of the Prentice Hall FINANCE CENTER CD. This unique companion software provides the student with a powerful finance mathematics tutorial, FINCOACH; a broad and informative look at the world of finance through interactive interviews with a vast array of people working in finance; and a direct link to PHLIP (Prentice Hall Learning on the Internet Partnership). PHLIP provides current articles geared to specific chapters in the text as well as a FREE On-line Study Guide where students can test their skills and understanding. Our intention is to present finance in such a way that it inspires students to learn.
Two key characteristics of Financial Management: Principles and Practice are theoretical currency and relevance. One of the authors of the text is an academic with over twenty years of teaching experience and the other is a full-time financial practitioner. This combination of backgrounds results in a text that presents the latest in financial theory while retaining a strong "real-world" connection. No other textbook on the market enjoys this balance of academic and practitioner
perspectives.
There are a few cartoons in this book. Do not allow their presence to mislead you. This book is serious about learning and the cartoons serve a serious purpose. They tend to "lighten up" the presentation in order to capture the students interest. Although our style is lighthearted, the writing itself is substantive, concise, clear, and easy to understand.
DISTINCTIVE FOCUS
Although there are many other introductory financial management books on the market, none contain the unique style and content of Financial Management: Principles and Practice, second edition. Many texts focus mostly on accounting with little presentation of the economic theory that underlies the financial techniques presented. Others assume that the students remember all that was learned in the accounting course that is usually a prerequisite for this course. Still others claim to take a "valuation approach" but present their topics in a straight accounting framework. In this book we are serious about focusing on what creates value. We are consistent in this approach throughout the book, addressing such issues as what creates value, what destroys it, and how value and risk are related. In so doing we maximize the value of the finance course to the student.
ORGANIZATION OF THE TEXT
The book is organized into five major parts as follows:
Part I. The World of Finance contains chapters on the structure and goals of firms, the role of financial managers, and an examination of the financial environment.
Part II. Essential Concepts in Finance presents chapters on accounting statements and their interpretation, forecasting, risk and return, the time value of money, and security valuation.
Part III. Long-Term Financial Management Decisions are included in chapters on capital budgeting, incremental cashflow estimation, capital structure, bonds, preferred stock, and leasing, common stock, and dividend policy.
Part IV. Short-Term Financial Management Decisions includes chapters on working capital policy, cash and marketable securities, accounts receivable and inventory, and short-term financing.
Part V. Finance in a Global Economy is where international finance topics are covered, in addition to those international topics that are woven throughout the book.
SPECIAL FEATURES IN THE TEXT
Real-World Examples
Each chapter in Financial Management: Principles and Practice begins with a real-world example that illustrates the concept to be addressed in that chapter. This serves to give the student a reason to learn this material and to show its practical application.
Special Boxes
Three different types of special boxes are integrated into the chapters. Ethical Connections boxes identify many financial decisions that have ethical dimensions to them. Financial Management and You boxes take financial management concepts intended for use within a firm and show how these same concepts can be used by individuals for personal financial decision making. This makes these topics less distant. Finance At Work boxes are designed to demonstrate how finance relies on, contributes to, and interacts with other functional areas of the firm. Not every student taking this course is a finance major and the understanding of the cross-functional role of finance within the firm is important.
Take Note
Located in the margins of the text pages, these helpful notes contain learning tips, offer additional examples, or show how material links to business practice.
Flipback
These margin icons provide the student with a convenient way to review perquisite information previously covered and necessary for the comprehension of material later in the text. These icons become especially convenient if certain chapters of the text are not assigned or read prior to the chapter under study.
Calculator Solutions
Financial calculator solutions to all general time value of money and specific security valuation problems are clearly illustrated within the text using keystroke functions to a TI BAII Plus Calculator solution. However, differing preferences as to the use of other calculators is accommodated with the "Calculator Guide for Financial Management" card provided with each text. This card provides keystroke procedures for the Texas Instruments BAII Plus, BA II, and BA-35 as well as the Hewlett-Packard 12C.
Summaries
The summary for each chapter specifically describes how the learning objectives have been achieved and it also provides a bridge to the next chapter.
Key Terms
Each chapter has bolded key terms that are defined in the chapter and in the glossary. There are self-test questions and problems at the end of chapters, along with their solutions, so that students can check their grasp of the material presented.
Practice Questions and Problems
Study questions and an abundant number of end-of-chapter problems are included in the appropriate chapters. Self-Test Questions and Problems are included with answers provided in the text. Answers to Review Questions and Problems are provided in the Solutions Manual and on the PHLIP Web site.
Computer Spreadsheet Supported Problems
A number of end-of-chapter problems are marked with the special computer problem logo shown above. This indicates that a downloadable Excel spreadsheet
template for the problem is available at the PHLIP-Financial Management: Principles and Practice Web Center. Access the PHLIP web site on the World Wide Web at http://www.prenhall.com/gallagher. Once at the Web site, proceed to the applicable text chapter and locate the spreadsheet template corresponding to the problem number in the text. Follow the instructions to download the file to your computer.
FinCoach Drills
Following each chapter requiring the understanding of quantitative skills, the student is directed to the respective practice drills in the FinCoach software program contained in the Prentice Hall Finance Center CD provided on the inside back cover of this test.
Communication Skills
Suggested assignments to build students written and oral communication skills are included in each chapter.
Cartoons
Cartoons are added for fun, and occasionally to make a financial point.
CHANGES IN THE SECOND EDITION
Color has been integrated to assist the pedagogy and to make the book easy to read.
Regulatory, legal, and industry practice changes have been thoroughly updated in this new edition. These include changes in reserve requirements, capital gains rates, and ex-dividend date policy to name a few.
Time-sensitive examples have been updated. The number of companies students can relate to such as Yahoo!, Lucent Technologies, and GeoCities has been
increased.
Almost all first edition chapter openers were replaced with newer, real-world vignettes or interviews that make the students want to read the content of that chapter.
EVA, MVA, and EBITDA coverage was added because of their extensive real-world usage in financial analysis.
Real options are covered in the capital budgeting chapters.
End-of-chapter problems were expanded, including some of increased difficulty, along with changes that were made in some so as to increase clarity and to correct some errors.
Fincoach: The Financial Management Math Practice Program which has helped thousands of students learn financial mathematics has been integrated into the pedagogy of the text. Each quantitative chapter contains an end-of-chapter FinCoach Drill Section. Students will find the Fincoach software contained in the Prentice Hall Finance Center CD accompanying the text.
Substantial updates were made to the international coverage. This includes the financial troubles in Asia, the EU, and EMU, and the introduction of the euro. End-of-chapter problems and examples were similarly changed to reflect the new material. More international content was woven throughout all of the chapters in addition to the changes made to the dedicated international finance
chapter.
Most of the Ethical Connections boxes and Financial Management and You boxes were rewritten or updated.
A multilevel quality control program was implemented for the text and supplements. The authors personally oversaw these activities and checked each item. This quality control program included:
Ferreting out and fixing errors in the first edition.
Rewriting and verifying the test bank and solutions manual.
Enhancing and updating PowerPoint slides as well as all spreadsheet templates.
FEATURES RETAINED FROM THE FIRST EDITION
The book is still written in the student-friendly style that was extremely popular in the first edition. The concise, easy-to-understand presentation loved by student users is maintained.
The book still maintains the level of rigor professors demand. When professors get past the friendly style, they find all the rigor and all the mainstream topics they expect in a book of this type. For example, if you are not already a
Gallagher/Andrew user, does your book:
Cover real options?
Cover EVA, MVA, and EBITDA?
Use a value added (NPV) approach to the inventory and accounts receivable investment coverage rather than the outmoded return on investment ratio approach?
Use examples of high-tech and Internet companies so as to hold student interest?
Include the euro in its international coverage and exchange rate problems?
Have supplements that were not "farmed out" to subcontractors but that instead have the authors hands-on participation?
Attempts to expand the book, and to make it longer, have been resisted. The topics that professors actually teach are here. Those that are most likely to be taught in the second course in financial management are left out. Students don't have to buy more than they need.
