1 introduction to financial mgt

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  • La evolución de UNION FENOSA desde una empresa exclusivamente eléctrica de ámbito nacional a su configuración actual es la historia de un aprovechamiento del conocimiento adquirido en su propio proceso de transformación.
    En 1985, UNION FENOSA tenia una situación financiera delicada, próxima a la quiebra como resultado del proceso inversor de años anteriores. En ese momento la dirección de la empresa lanza un proyecto de transformación basado en la tecnología, lo que posteriormente se conoce como reingeniería. Como consecuencia de ese proceso se desarrollan sistemas de información y habilidades de consultoría y transformación de empresas. Otras compañías de utilities muestran interés por los sistemas de gestión de UNION FENOSA y comienza una actividad de consultoría internacional que en 1990 tenía 10 personas (en un primer proyecto en Uruguay) y hoy tiene 7.000 personas en todo el mundo.
    Paralelamente se crean empresas de sistemas, calidad, ingeniería, etc… a partir de departamentos internos de la empresa que a comienzos de los 90 se externalizan y empiezan a dar servicio a clientes externos además de al propio grupo.En el año 2000 todas esas empresas (10) junto con la actividad de consultoría internacional se unen bajo la marca SOLUZIONA y suponen una facturación de 600 millones de euros.
  • 1 introduction to financial mgt

    1. 1. By Dr. B. Krishna Reddy Professor and Head_SKIM
    2. 2. 1.1. Introduction 1.2. Defining finance 1.3. The Firm: a sistemic approach 1.4. Corporate Finance: the financial function 1.5. The financial objective: value creation 1.6. Financial main principles 1.7. Finance: historic evolution 1.8. Main programmes in Finance
    3. 3. I am saving for retirement. Should I use a pension fund, mutual fund, direct stock market investment ? I want that new car. Should I use my cash saving, lease, borrow? Which is the best way to pay for my holidays, for my house? I’m thinking about starting a new business. Will it reward me adequately? Marocco has asked for major project financing. Should my organization provide the funds?
    4. 4. Why study finance? To manage your personal resources To deal with the world of business To pursue interesting and rewarding career opportunities To make informed public choices as a citizen For the intellectual challenge
    5. 5.  Household  Business Firms  Government  Foreign Sector SURPLUS SPENDING UNITS DEFICIT SPENDING UNITS
    6. 6.  Has more cash income flow than expenditure on consumption and real investments in a period of time. The surplus is then allocated to the financial sector.  Other terms for surplus unit are saver, lender, buyer of financial assets, financial investor, supplier of loanable funds, buyer of securities.
    7. 7.  The surplus unit may buy financial assets, hold more money, or pay off financial liabilities issued earlier when in a deficit situation  The household and foreign sectors are usually a surplus sector
    8. 8.  Has more expenditures on consumption and real goods (investment) in the real sector than income during a period of time  The deficit unit must participate (borrow) in the financial sector to balance cash inflows with outflows
    9. 9.  Other terms for deficit expending unit are borrower, demander of loanable funds, and seller of securities.  The deficit spending unit may issue financial liabilities, reduce money balances, and sell financial assets acquired previously when in a surplus situation
    10. 10.  Contracts related to the transfer of funds from surplus to deficit budget units  Financial claims are also called financial assets and liabilities, securities, loans, and financial investments.  For every financial asset, there is an offsetting financial liability.  Total receivable equal total payable in the financial system  Loans outstanding match borrowers’ liabilities
    11. 11.  Financial markets offer opportunity for: › Financing for DSUs (primary) › Financial investing for SSUs (primary and secondary) › Providing liquidity via trading financial claims in secondary markets
    12. 12. THE FLOW OF FUNDS DIAGRAM Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) FundsFunds Financial Assets = Financial Claims
    13. 13. THE FLOW OF FUNDS DIAGRAM Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) FundsFunds Financial Assets = Financial Claims Borrower demander of loanable funds seller of securities Saver, lender buyer of financial assets financial investor supplier of loanable funds buyer of securities.
    14. 14.  Assets: any possession that has value in an exchange › tangible: value depends on particular physical properties (reproducible and non- reproducible) › intangible: legal claims to some future benefit. Financial assets
    15. 15.  Main properties of financial assets › Rate of return (R): expected return › Risk (r): credit risk, market risk › Liquidity (L): how much sellers stand to lose if they wish to sell immediately against engaging in a costly and time-consuming search (J.Tobin)
    16. 16. THE FLOW OF FUNDS DIAGRAM DIRECT FINANCING (Markets) Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) INDIRECT FINANCIAL INVESTMENT OR INTERMEDIATION FINANCING Brokers Dealers Intermediaries FundsFunds Funds Funds
    17. 17. THE FLOW OF FUNDS DIAGRAM DIRECT Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) INDIRECT Brokers Dealers Intermediaries FundsFunds Funds Funds Direct Financial Assets Purchase Indirect Financial Assets Purchase Direct Financial Assets Issue Direct Financial Assets Issue
    18. 18.  What is Finance?  Types of Finance definitions › Lack of any specific definition › Raising and spending funds › Economic decisions with a time component › Micro/Macro: need for integration
    19. 19.  Finance is analytical.  Finance is based on economic principles.  Finance uses accounting information as an input for decision-making.  Finance is international in perspective.  Finance is constantly changing.  Finance is the study of how to invest and raise money productively http://garnet.acns.fsu.edu/~ppeters/fin3403/
    20. 20.  Finance is the study of how people allocate scarce resources over time › costs and benefits are distributed over time › but the actual timing and size of future cash flows are often known only probabilistically  Understanding finance helps you evaluate these uncertain cash flows Bodie and Merton
    21. 21.  When implementing decisions, people make use of the Financial System which can be defined as the set of markets and other institutions used for financial contracting and exchange of assets and risks Bodie and Merton
    22. 22.  Financial theory consists of: › the set of concepts that help to organize one’s thinking about how to allocate resources over time › the set of quantitative models used to help evaluate alternatives, make decisions, and implement them  These concepts and models apply at all levels and scales of decision making Bodie and Merton
    23. 23.  A basic tenet of finance is that the existence of economic organizations (e.g. firms and governments) facilitate the satisfaction of people’s consumption preferences Bodie and Merton
    24. 24.  Finance Theory is the study of the behaviour of individuals in the intertemporal allocation (over time) of their resources in an uncertain environment, and the study of the function of economic institutions and markets in making these allocations possible. Economía Financiera Marín, José M. / Rubio, Gonzalo Antoni Bosch, Editor, Barcelona, 2001
    25. 25.  The practice of “finance” exists for the creation of value  Financial contracting brings about the substitution of real wealth (i.e. real business assets) for financial wealth (i.e. securities) Investing in financial securities has better attributes that in real assets. Value is created in tthe real assets held by businesses, and then transmitted into the value of financial wealth issued by businesses and held by investors. Norton y Scott, “A new Paradigm: the value creation function of finance”, january 2001
    26. 26. Finance is the process of transforming existing assets into new, contractual forms, as well as the analytical techniques needed to support this process, for the purpose of wealth creation in modern, capitalistic economies. Norton y Scott, “A new Paradigm: the value creation function of finance”, january 2001
    27. 27.  Financial management (Corporate finance) deals with how firms raise and use funds to make short-term and long-term investments.  Investment deals with how the securities markets work and how to evaluate and manage investments in stocks and bonds.  Financial Markets and Institutions includes the study of the banking system and markets. Peterson and Fabozzi
    28. 28. 1.1. Introduction 1.2. Defining finance 1.3. The Firm: a sistemic approach 1.4. Corporate Finance: the financial function 1.5. The financial objective: value creation 1.6. Financial main principles 1.7. Finance: historic evolution 1.8. Main programmes in Finance
    29. 29. Subsistema de recursos humanos Subsistema de dirección y gestión Subsistema de dirección y gestión Subsistema comercial Subsistema de operaciones Dinero Dinero Personal Personal Bienes y servicios Personal Personal Goods and Services Resourses Expenses Sales Incomes Subsistema de recursos humanos Human Resources Subsystem Subsistema de dirección y gestión Management Subsystem Subsistema de dirección y gestión Finance Subsystem Commercial Subsystem Operations Subsystem Funds Funds Hum an resources Hum anresources Goods and Services Personnel Human Resources Resourses
    30. 30. FINANCIAL SUBSYTEM Planificación FinancieraPlanificación Financiera FINANCIACIÓN Financiación Externa Autofinanciación Beneficio INVERSIÓN Financiación en activo fijo Inversión en activo circulante Costes Subsistema de recursos humanos Subsistema de operaciones Subsistema comercial Subsistema de dirección y gestión Demanda de créditos Valores Mercados Financieros Dividendos Impuestos E N T O R N O Dinero Recursos Expenses Resources Amortización Reservas Planificación FinancieraPlanificación Financiera FINANCIACIÓN Financiación Externa Autofinanciación Beneficio INVERSIÓN Financiación en activo fijo Inversión en activo circulante Costes Subsistema de recursos humanos Subsistema de operaciones Subsistema comercial Subsistema de dirección y gestión Demanda de créditos Valores Mercados Financieros Dividendos Impuestos E N T O R N O Dinero Recursos In Amortización Reservas Planificación FinancieraFinancial Planning FINANCIACIÓN Financiación Externa Autofinanciación FINANCING External Financing Retained earnings BeneficioBenefit INVERSIÓN Financiación en activo fijo Inversión en activo circulante Costes INVERSIÓN Financiación en activo fijo Inversión en activo circulante INVESTMENT Fixed Asset Current Assets Costs Subsistema de recursos humanos Human Recourses Subsystem Subsistema de operaciones Operations Subsystem Subsistema comercial Commercial Subsystem Subsistema de dirección y gestión Management Subsytem Demanda de créditos Valores Mercados Financieros Dividendos Impuestos E N T O R N O Debt Securities Financial Market Dividends Taxes E N V I R O N M E N T Funds Resources Income Empoloyees Depreciation Reserves
    31. 31. • Corporations face two broad financial questions: - What investments should the firm make? - How should it pay for those investments? Financial managers are concerned with : • Investment Decisions (use of funds): – The buying, holding or selling of types of assets • Financing Decisions (acquisitions of funds)
    32. 32. FINANCIAL MANAGEMENT (CORPORATE FINANCE) r ( r > k ) k FINANCIAL SYSTEMREAL SYSTEM INVESTMENT FINANCING INVESTMENT / FINANCIAL SUBSYTEM RETURN REPAYMENT AND RETURN FINANCIAL MARKETS FIRM OPERATIONS (Real goods & services
    33. 33. • Goal of management: maximize the economic well-being, or wealth, of the owners (current shareholders) => maximize the price of the stock • Share price today = Present value of all future expected dividends at required return ∑ ∞ =      + = 1 1 .max.Pr.. i i i k d iceShareMax
    34. 34. • Financial managers must create or generate value for their shareholders. • Economic Value Added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). • The formula for calculating EVA is as follows: EVA = Net Operating Profit After Taxes - (Capital * Cost of Capital)
    35. 35. • Rational Financial behavior • Risk aversion • Budgetary diversification • Existence of two parts in all financial transaction • Measurement by cash flows • Signaling and informative asymmetry • Efficiency of financial markets • Direct relation of risk and return • Existence of valuable ideas • Financial conduct initiative • The Time Value of the money and value additivity.
    36. 36. Principles of century XX: Beginning of the research in finance EVENTS Finance at the present - Expansion of the Years 20 - The 29 Crises - Economy military of the 40 - Expansion of the 50 - Crises of the petroleum of the 73
    37. 37. M o d e r n A p p r o a c h 1900- 1950- 1970- 1980- 1990- Classical Approach APT Model (Ross, 1970) Options Valuation Models (Black y Scholes, 1973) Portfolio selection Theory (Markowitz, 1952,1959) CAPM (widening and reformulation) Dividends Policy (Modigliani, Miller, 1963) Capital Assets Pricing Model (CAPM) (Sharpe, 1963-4, Lintner, 1965) Efficient Market Theory (Fama, 1970) Financial Structure (Modigliani, Miller, 1958) Agency Theory Information Theory Financial Innovation Methods based on Fuzzy Sets Theory (Kaufmann y Gil, 1986-87) Chaos Theory, Non Linear Dynamics Markets Efficiency Paradigmyears70 Behavioral finance 2000- Lecture 1: What is finance? (II) 1.10. Finance: historic evolution
    38. 38. • Managements of Investments- Capital Budgeting. • Capital Structure and Dividend Policy. • Market Efficiency. • The Capital Asset Pricing Model. • Options Theory • Agency Theory • Financial Planning • Small Firms
    39. 39.  Kidwell, Peterson, Blackwell, Whidbee: Financial Institutions, Markets, and Money, Eighth Edition, John Wiley & Sons, 2003  Fabozzi, Modigliani: Capital Markets. Institutions and Instruments. Prentice Hall, 2003  Bodie, Zvi and Merton, Robert C.: Finance. Prentice Hall, 1999  Pamela P. Peterson and Frank Fabozzi: Financial Management and Analysis, 2nd Edition, John Wiley & Sons, 2003

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