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Chapter 1.An Introduction to Finance ppt

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An Introduction to Finance

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Chapter 1.An Introduction to Finance ppt

  1. 1. An Introduction To Finance
  2. 2. Section 1 The Role and Scope of Finance 2
  3. 3. What is Finance? A term that refers to two main activities; othe actual process of attracting money; oand the management of these funds; 3
  4. 4. The Functions of Finance Analysis; Decision-making; 4
  5. 5. The Areas of Finance  Business or Corporate Finance-the firm’s ability to make good finance decisions;  Personal Finance-retirement provision, saving plans etc.,; Public Finance-income distribution, stability plans etc.,; 5
  6. 6. Finance v Accounting  Financial Accounting concentrates on record keeping and submitting of financial statements;  Finance focuses on making decisions and carrying out analysis based on information presented by accounting; 6
  7. 7. Finance v Accounting(cont.) Financial Accounting tends to be more concerned with the past;  Finance tend to be more interested in present and the future; 7
  8. 8. Finance v Accounting(cont.)  Financial Accounting tends to have an income focus;  Finance tends to have a cash flow focus; 8
  9. 9. Business Finance Types of Financial Decisions  Investment Decisions;  Financing Decisions;  Asset Management Decisions; 9
  10. 10. Investment Decisions  Should we built this component or buy it?  What specific assets should be acquired?  Should we introduce a new product?  Which projects should be undertaken? 10
  11. 11. Financing Decisions  What is the best structure of financing(debt versus equity)?  How much of our debt should be short- term as opposite to long-term?  What is the best dividend policy?  How will the funds be physically acquired? 11
  12. 12. Asset-Management Decision  How do we manage existing assets efficiently?  Financial Manager has varying degrees of operating responsibility over assets;  Greater emphasis on current asset management than fixed asset management; 12
  13. 13. The Goal of the Business 13  The target of business is the maximize shareholder’s wealth;  It’s measured as the price of stocks;  Wealth maximization concept adjusts for deficiencies of previous concept;
  14. 14. Profit Maximization  Short-Term Oriented;  Can not account for risk;  Can lead mismanagement; Wealth Maximization  Long-term Oriented;  The risk factor is taken account;  Recognizes the timing of returns; 14 Comparison of Two Concepts
  15. 15. Section 2 An Overview of Business Environment 15
  16. 16. Types of Businesses Sole Proprietorships  A business that owned and operated by one individual;  The owner and the business are legally identical; 16
  17. 17. The Pros and Cons of Sole Proprietorships 17
  18. 18. Partnerships  A business that owned and controlled by two or more persons who are equally liable for losses;  Typically governed by partnership agreement; 18
  19. 19. The Pros and Cons of Partnerships 19
  20. 20. Company • Business that owned by shareholders; • Shareholder liability is limited to nominal value of shares that they own; • Business is legally separate from it’s owners; 20
  21. 21. The Pros and Cons of Company 21
  22. 22. Section 3 Corporate Structure 22
  23. 23. The Modern Corporation There exists a SEPARATION between owners and managers. Modern Corporation Shareholders Management 23
  24. 24. Organizational Chart of Corporate Structure 24
  25. 25. Role of Management  An agenagentt is an individual authorized by another person, called the principal, to act in the latter’s behalf;  Management acts as an agentagent for the owners (shareholders) of the firm; 25
  26. 26. Agency Theory Principals must provide incentivesincentives so that management acts in the principals’ best interests and then monitormonitor results; Incentives include stockstock options, perquisites,options, perquisites, and bonusesbonuses; 26
  27. 27. Section 4 A Quick Tour to Financial Environment 27
  28. 28. Financial Markets  Businesses interact continually with the financial markets;financial markets;  Composed of all institutions and procedures for bringing buyers and sellers of financial instruments together; 28
  29. 29. The Purpose of Financial Markets  Mobilization of savings-uselessly lying fund is made to flow the place where it is really needed;  Facilitate price discovery-the price is determined by the forces of demand and supply;  Provide liquidity to financial assets-buyers or sellers of securities are available all the times;  Reduce the cost of transaction-making all necessary information available without any cost; 29
  30. 30. Flow of Funds in the Economy INVESTMENT SECTOR FINANCIAL INTERMEDIARIES SAVINGS SECTOR FINANCIAL BROKERS SECONDARY MARKET 30
  31. 31. Types of Financial Markets  Money Market-market for trading of short-term securities(Repo, CDO, commercial paper, T-bills);  Capital Market-where the transaction of long-term securities takes place(corporate bonds, government bonds);  Primary Market-newly issued instruments are bid;  Secondary Market-already issued stocks are sold and bought; 31
  32. 32. Financial Intermediaries  Come between ultimate borrowers and lenders by transforming direct claims to indirect claims;  Commercial banks, insurance funds,mutual funds; 32
  33. 33. Efficient Allocation of Funds  Funds will flow to economic units that are willing to provide the greatest expected return;  The highest expected returns will be offered only by those economic units with the most promising investment opportunities;  Result:Result: Savings tend to be allocated to the most efficient uses; 33
  34. 34. What Influences Security Expected Returns?  Default Risk-the failure to meet the terms of contract;Default Risk-the failure to meet the terms of contract;  Marketability-Marketability- is the ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession; 34
  35. 35. What Influences Expected Security Returns?  Maturity-Maturity- is concerned with the life of the security; the amount of time before the principal amount of a security becomes due;  Embedded Options-Embedded Options- provide the opportunity to change specific attributes of the security;  InflationInflation -the greater inflation expectations, then the greater the expected return; 35
  36. 36. Risk-Expected Return Profile RISK EXPECTEDRETURN(%) U.S. Treasury Bills (risk-free securities)U.S. Treasury Bills (risk-free securities) Prime-grade Commercial PaperPrime-grade Commercial Paper Long-term Government Bonds Investment-grade Corporate Bonds Medium-grade Corporate Bonds Preferred Stocks Conservative Common Stocks Speculative Common Stocks 36
  37. 37. Term Structure of Interest Rates A yield curve is a graph of the relationship between yields and term to maturity for particular securities. Upward Sloping Yield CurveUpward Sloping Yield Curve Downward Sloping Yield Curve 0246810 YIELD(%) 0 5 10 15 20 25 30 (Usual) (Unusual) YEARS TO MATURITY 37
  38. 38. THANK YOU

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