MONASH

BUSINESS
SCHOOL

BFF5954
BUSINESS FINANCE

SEMESTER ONE, 2024

 Getting Started: Accounting and Finance
Accountants are primarily concerned with a goal that is historical looking. In finance, the
goal is future looking.

Accounting: Finance:
• Recording and tracking of transactions • Usage of money

• How you got where you are? • Where you are going to go next?

• Past transactions: Balance Sheet, Profit & • Investing – Begin with financial statements, decide
Loss and Cashflow. on assumptions for the future.

• Assets = Liabilities + Equity • Income = Revenue – Costs

• What I have. • Revenue = Price Item/Service x Units Sold
• What I owe. • Costs = Variable Costs + Fixed Costs
• What I own • Discounted Cashflow ~ Value

• Risk – Mistakes in financial reports that look • Risk – Assumptions about the future are incorrect.
to the past are incorrect

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What is Business Finance

The Financial Management function is centered around

Business (or Corporate) finance, which attempts to find
the answers to the following questions:

 What investments should the firm take on?

THE INVESTMENT DECISION
 How can cash be raised for the required investments?
THE FINANCE DECISION
 How should wealth be redistributed to shareholders?
THE DIVIDEND DECISION

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The Corporate Objective

 Primary goal is to maximise the value of the firm, which is

same as maximising shareholder wealth.

 Every decision that we make as financial managers needs to

come back and answer this question

“Have we added value?”

If the answer is “yes” the we should undertake the decision

If the answer is “no” then we should not!

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Its all about the Cash, baby!
 A firm can generate cash flow by selling goods and services
produced by productive assets or generated via human capital

 The firm can then opt to; 1) pay remaining cash (residual cash
flow) to the owners (or shareholders); or 2) reinvest back into
the company for growth.

 Accounting profits are not the same as cash flow, leave

accounting to the accountants!
 Why? Profit maximisation ignores size; timing and risk associated with
receipt of cash

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Cash Flow

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 MONASH
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Unit Details
What I need to know
 name: John Watson
email: jr.watson@monash.edu
phone: 9903-2171
consultation: H3.66
Tuesday 10am – 11am
Tuesday 3:30pm – 4:30pm

personal site: John Watson — Monash University

IMPORTANT:
MY E-MAIL ADDRESS IS NOT: JOHN.WATSON@MONASH.EDU

JOHN.WATSON WORKS FOR ANIMAL SERVICES

Animal Services, Faculty of Medicine, Nursing and Health Sciences Email: john.watson@monash.edu. Title: Transport Driver
name: Goran Torbakov (Lead TA)
email: Goran.Torbakov@monash.edu
consultation: Monday 12 noon – 1:30 pm

Zoom link:
https://monash.zoom.us/j/87223795367?
pwd=cm5ldVV3K3NmVDd2S0FxbW5VS3Fx
Zz09
TEACHING STAFF (CAULFILED)
10
Help Sessions (Student Consultation with teaching staff)

In addition to attending your allocated seminars and tutorials you are also encouraged
to attend and participate in consultation sessions with your allocated tutor. A list of
available student consultations is available here and also on Moodle under heading
“unit information”:

Zoom Link for online consultation with Mr. Goran Torbakov: Consultation -
Monday’s 12PM-1.30PM LINK:
https://monash.zoom.us/j/87223795367?pwd=cm5ldVV3K3NmVDd2S0FxbW5VS3FxZz09
 IMPORTANT NOTE
11

It is policy within the department of Banking and Finance to

respond only to any electronic enquiries (e-mail) that have been
received from an authorised student e-mail address.

 Note, that email is not a recognised teaching tool and that if

staff are contacted with requests on how to answer problems
via email you will be asked to attend consultation.
 IMPORTANT NOTE
12

MOODLE ADMINISTRATION AND WHEN

MATERIALS WILL BE AVAILABLE ON A
WEEKLY BASIS

 Lecture Materials: Wednesday 9am each week

preceding class.
 Tutorial Set Questions: Monday 8pm each week
preceding class.
 Tutorial Set Solution: Wednesday 9am every week
following completion of tutorial activities on Tuesday.
 ASSESSMENT – BFF5954
13

ASSESSMENT TASK DUE DATE VALUE

Mid Semester Test Week 6 (refer to your personal timetable) 25%

Weeks 1; 2; 3; 4; 6; 7; 8; 9; 10; and 11 (deadline is

On Line Learning Activities 25%
Friday 11:55pm each week)

Final Examination Official Examination Period (to be announced) 50%

TOTAL 100%
 Mid-Semester Test - 25%
14

There is no scheduled seminar in teaching week six

(Monday 8 April)

The date for the MID-SEMESTER TEST in week 6 is as follows:

Date: Wednesday 10 April, 2024

Time: 3pm
Duration: 60 minutes
Venue: Online (Moodle Quiz)
 Mid-Semester Test - 25%
15

 The test will include material in Seminars 1-5 and Tutorials 1-6
 A detailed medical certificate and a special consideration
application will be required if the assessment is missed.
note: You can apply for a short extension of two calendar days for
most assessments (assignments, essays, projects, etc.), but not
for
an in-class test, a mid-semester test or a scheduled final
assessment.

The make up test for BFF5954 will be held (in teaching week 10) on

Friday 10 May between 10am and 11am

Online Learning Activities – 25%
16
Due date: Friday 11:55pm each week (Teaching weeks; 1; 2; 3; 4; 7; 8; 9; 10; and
11) note learning activity 5 is due Wednesday 10 April at 11:55pm.

Weighting/Value: 25% (maximum 2.50% per on line exercise submitted and

graded).

Details of Task: This task requires students to complete the ‘Pearson My Finance
Lab online learning activities’ available in Moodle. Look for the following under
“Getting started” to access activities

The purpose of the on-line exercises are to reinforce material discussed in seminars. The exercise in
week 1 and (week 2) will cover material discussed in lectures during week 1 and (week 2) respectively.
Online Learning Activities – 25%
17

 Given the importance of the online learning activities in building

the foundational knowledge to enable yourself to gain a deeper
understanding of the content My Finance Lab exercises 1-5 will all
be opened again for all students in teaching week 5, week
commencing Monday 25 March. These exercise will all close at
11:55PM on Wednesday 12 April. In addition, My Finance Lab
exercises 1-10 will all be opened again for all students in week 12,
week commencing Monday 20 May. If you missed one of the
exercises (i.e. still have unused attempts left), this will give you an
opportunity to complete it.

 All My Finance Lab exercises will close Friday May 24 at

11:55pm for all students.
Online Learning Activities – 25%
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• YOU WILL HAVE THREE (3) ATTEMPTS AT EACH ONLINE LEARNING
ACTIVITY (QUIZ).

• EACH ATTEMPTS LASTS 60 MINUTES.

• THE SYSTEM WILL ALLOW YOU KEEP YOUR BEST MARK AND COUNT
THIS TOWARDS YOUR FINAL GRADE.

• THE SYSTEM WILL ALLOW YOU TO USE TEACHING AIDS (i.e. HELP ME
SOLVE). BUT USING THESE AIDS WILL COUNT AS ONE OF YOUR THREE
ATTEMPTS.

• NOTE, THAT THE SYSTEM IS VERY SENSITIVE TO THE FORMAT IN

WHICH YOU GIVE YOUR ANSWER. FOR EXAMPLE, IF QUESTION ASKS
TO ROUND TO THE NEAREST CENT IT WILL EXPECT YOU TO ROUND TO
2 DECIMAL PLACES. DO NOT ENTER THOUSAND SEPARATORS, % SIGNS
ETC.

• YOU ARE ADVISED TO READ ALL DOCUMENTS PROVIDED ON THIS

LANDING PAGE PRIOR TO UNDERTAKING YOUR FIRST ATTEMPT.
Online Learning Activities – 25%
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How you access

Online activities
Tutorials
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• Tutorials are held reinforcing materials discussed in the previous

weeks seminars. Tutorials have already commenced and in theory
many of you have already met your tutor.

• Get to know your tutor. KNOW THEIR NAME!

• Questions for the following weeks tutorial can be downloaded

from Moodle each Monday after each weeks seminar.

• Solutions will be made available on Moodle on Wednesday

morning following the completion of all tutorial activities for a
given week.
Comprehensive Final Exam - 50%
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 The final exam will contain all the material covered in seminars,
tutorials and the prescribed reading, and is of two hours duration
plus ten minutes for reading.

 There is NO hurdle requirement in this unit.

 Details about the structure of the exam with a FAQ document

will be released on Moodle under week 13 Moodle Block titled
“Swot Vac - Exam Consultation and Exam Information”.
This material will be release closer to the date of the final exam.
Prescribed Text
22
Prescribed text(s)

Berk and DeMarzo, (2024) Corporate Finance, 6/e, Global Edition,

Pearson. ISBN-13: 9781292446356

You all have access to the e-text through MyLab and Mastering
Course Home available via the Pearson platform available on Moodle
under “Getting Started”. Look for the following
Calculator
23
• A financial calculator is HIGHLY recommended.
Workload
24

• 3 hrs per week in class (seminars and tutorials)

• 9 hrs per week outside of class
• Read the lecture notes AND the relevant section of
the textbook BEFORE seminars
• Attend seminars and review materials after class
• Attempt tutorial questions before class and attend ALL
tutorials
• Review tutorial answers after class
• Keep up with the material and you will do well!
 MONASH
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Teaching Week One

Introduction to business finance;
and financial mathematics.

PRE-CLASS READINGS:
Chapter 1 (Sections 1.1-1.2 pages 35-43), Chapter 3
(Section 3.2 pages 103-105) and Chapter 4 (Sections
4.1-4.3 pages 137-145).
 MONASH
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Learning Objectives

• (1) Understand the notion of time value of

money;

• (2) Compounding and discounting techniques,

FV and PV of a single sum cash flow; and

• (3) Understand differences between effective

(EAR) and nominal (NIR) interest rates.
Time Value of Money

“ A dollar today is worth

more than a dollar
tomorrow. ”

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 Computational Aids

 Non Programmable Financial Calculators => HP10II+

The preferred calculator of use for CFA

 Computer Software (e.g. Microsoft Excel – BFF5954)

 Time Lines (Basic but advised, at least early on)

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Time Lines
Tick marks at ends of periods – time, n= 0 is today,
n = 1 is the end of period 1 (or the beginning of period 2)
Compounding techniques - FV

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Four Important Cash Flow Patterns

1) Single Sum or Lump Sum Cash Flow

2) Mixed Stream or Multiple Cash Flow
3) Annuities
4) Perpetuities

Financial Mathematics requires work (practice).

The main goal is to ensure we have time comparability.

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Single Sum or Lump Sum Cash flows
(Lump Sum Cash Flow Pattern)
Interest is ted:

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 Simple Interest

 Simple Interest is determined by multiplying the interest rate

by the principal by the number of periods.

Interest = Principal x periods x interest

rate
Example 1-1: Assume you borrow $50,000 today and promise to
repay a lump sum in 90 days time. How much do you need to repay if
the
market interest rate is 7% p.a.

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 Future Value (Compounding Techniques)
The total amount due at the end of the investment is
called the Future Value (FV) and involves compounding interest.

Interest is received on accumulated interest from previous periods as

well as on the principal; that is, interest generates further interest.

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 Future Value Formula

• The general formula for the future value of an

investment over many periods can be written as:

FVn = C×(1 + r)n

Where
(C) is the cash flow at date 0,
(r) is the appropriate interest rate, and
(n) is the number of periods over which the cash is invested.

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 Future Value Lump Sum

Example 1-2: Suppose that you invested $1,000.00 in CBA

today. Assume also that you invest at a guaranteed fixed rate
of 6.00% per annum after tax for a period of 5 years. How
much will this amount grow to by the time the investment
account matures.

FVn = C×(1 + r)n

FV5 = $1000×(1.06)5 = $1,338.23

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Example 1-2 continued: Demonstrating compounding

$1000  (1.06) 5
$1000  (1.06) 4
$1000  (1.06) 3

$1000  (1.06) 2
$ 1000  (1 .06 )

$ 1000 .00 $ 1060 .00 $ 1123 . 60 $ 1191 .02 $ 1262 .48 $ 1338 .23

0 1 2 3 4 5
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 Example 1-2 continued: using Excel
FV
PV $ 1,000.00
r 6%
n 5

step 1 Click on the button in the formula bar.

step 2: Select financial functionality

step 3: Select FV

step 4: Enter data for known variables

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Example 1-2 Continued: using HP10II+ calculator

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 Present Value (Discounting Techniques)
The use of discounting techniques aids in finding the
current dollar amount of a given future value.

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 Present Value Formula
The general formula for the present value of a multi period case for a single cash
flow can be written as:

C
PV 
n
(1  r)
where
( PV ) is the cash flow at date n=0,
( r ) is the appropriate interest rate per period,
( n ) is the number of periods over which the cash is invested.

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 Present Value Lump Sum

Example 1-3: How much would you have to set aside today in
order to have $20,000 five years from now assuming the current
interest rate is 7.00%?

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 Example 1-3 continued: using Excel
FV $20,000.00
PV
r 7%
n 5

step 1 Click on the button in the formula bar.

step 2: Select financial functionality

step 3: Select PV

step 4: Enter data for known variables

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Example 1-3 Continued: using HP10II+ calculator

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Application: How Long is the Wait?
Example 1-4: If you deposit $5,000 today in an account
paying 10%, how long does it take to grow to $10,000?
FVn = C(1 + r)n FV $10,000.00
PV $ 5,000.00
$10,000 = $5,000(1.10)n r 10%
n

(1.10)n = $10,000/$5,000 step 1 Click on the button in the formula bar.

ln(1.10)n = ln(2) step 2: Select financial functionality

n×ln(1.10) = ln(2) step 3: Select nper

step 4: Enter data for known variables

n = ln(2)/ln(1.10)
n = 0.6931/0.0953
n = 7.27 years
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Example 1-4 Continued: using HP10II+ calculator

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Application: What Rate Is Enough?
Example 1-5: Assume the total cost of a 3-year commerce
university education will be $100,000 when your child enters
university in 20 years. Assume you have $5,000 to invest today.
What rate of interest must you earn on your investment to cover
the cost of your future child’s education?

FVn  C  (1  r ) n
$100,000
$100,000  $5,000  (1  r ) 20 (1  r ) 20   20
$5,000
(1  r )  201 20

r  201 20  1  1.1616  1  0.1616 or 16.16%

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 Example 1-5 continued: using Excel
FV $100,000.00
PV $ 5,000.00
r
n 20

step 1 Click on the button in the formula bar.

step 2: Select financial functionality

step 3: Select Rate

step 4: Enter data for known variables

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Example 1-5 Continued: using HP10II+ calculator
1

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 Aside: The Rule of 72

• The ‘Rule of 72’ (This rule is only an approximation, 72/r)

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 Nominal Interest Rates
• The nominal interest rate (NIR) is known is also
known as the annual percentage rate (APR) and is
simply the stated, or quoted, rate (e.g., 10% pa
compounded annually)

• The NIR is simply equal to the interest rate

charged per period multiplied by the number of
periods per anum.

• For example, if a bank charges 1% per month on

a car loan, the NIR is 1% x 12 = 12%
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 Compounding Frequency

• So far, compounding frequency has been assumed

to be annual. In reality compounding frequency is
greater than one in any given period.
m n
 r
FVn  C  1  
 m

• m is the frequency of compounding in a period

• r is the stated/quoted annual interest rate, and is
commonly called the nominal interest rate.

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 Compounding Periods

Compounding an investment m times a year for

n years provides for future value of wealth:

m n
 r
FVn  C  1  
 m

For example, if you invest $50 for 3 years at 12% compounded semi-annually, your
investment will grow to

2 3
 0.12 
FV  $50   1    $50  (1.06) 6  $70.93
 2 

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 Compounding Frequency
Example 1-6: A bank is offering 12 percent interest compounded quarterly, if you
put $200 in an account, how much will you have at the end of year 2?
42
 0.12 
FV 2  $200  1    $253.35
 4 
FV
PV $ 200.00
r 12%
n 2

step 1 Click on the button in the formula bar.

step 2: Select financial functionality

step 3: Select FV

step 4: Enter data for variables adjusting for componding frequency

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 Effective Annual Interest Rates
• The EAR (or effective annual yield) is the true interest
rate expressed as if it were compounded once per year:

m
 r
EAR  1    1
 m

where r = the quoted annual interest rate,

m = the number of compounding periods in a
year.

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 EFFECTIVE ANNUAL RATE

Example 1-7: You have $10,000 to invest for

one
year and the following choices are offered by
the banks in your area:

(a) 6% p.a., compounded annually;

(b) 5.95% p.a., compounded daily;

Which of the alternatives would you choose? MONASH

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Example 1-7 < Solution >

Work out the EARs

m 1
 r  0.06 
a) EAR  1    1  1    1  6.00%
 m  1 
m 365
 r  0.0595 
b) EAR  1    1  1    1  6.13%
 m  365 

Work out what you would get at the end of a

year, you would also choose (b)
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 Example 1-7 continued: using Excel
EFFECT EFFECT
n 1 n 365
r 6% r 5.95%
Bank A Bank B

step 1 Click on the button in the formula bar.

step 2: Select financial functionality

step 3: Select Effect

step 4: Enter known data for variables

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 2/3

Example 1-7 Continued: using HP10II+ calculator

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 MONASH
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Today we have been talking about single lump

sum cash flows.

Next week we will turn our attention to the

remaining cash flow patterns we need to be
familiar with, namely; mixed or multiple cash flow
stream The perpetuity, and The annuity.

59
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