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  1. 1.      Definition to finance Roles of financial manager Basic forms of business organization Goals of the firm Financial markets and institution
  2. 2. Activities that earn and use of capital – collecting, using and managing  Concern with the maintenance & creation of economic value or wealth  Focuses on the decision making toward creating wealth 
  3. 3. 1. 2. 3. 4. 5. Cash flow is what matters Money has a time value Risk requires a reward Market prices are generally right Conflicts of interest cause agency problems
  4. 4. Accounting profits are not equal to cash flows. It is possible for a firm to generate accounting profits but not have cash or to generate cash flows but not report accounting profits in the books.  Cash flow, and not profits, drive the value of a business.  We must determine incremental cash flows when making financial decisions.  Incremental cash flow is the difference between the projected cash flows if the project is selected, versus what they will be, if the project is not selected. 
  5. 5.  A dollar received today is worth more than a dollar received in the future.  Since we can earn interest on money received today, it is better to receive money earlier rather than later.
  6. 6.   We won’t take on additional risk unless we expect to be compensated with additional reward or return. Investors expect to be compensated for “delaying consumption” and “taking on risk”.  Thus investors expect a return when they put their savings in a bank (i.e. delay consumption) and they expect to earn a higher rate of return on stocks relative to bank savings account (i.e. taking on risk)
  7. 7. In an efficient market, the prices of all traded assets (such as stocks and bonds) at any instant in time fully reflect all available information.  Thus stock prices are a useful indicator of the value of the firm. Prices changes reflect changes in expected future cash flows. Good decisions will tend to increase the stock prices and vice versa.  Note there are inefficiencies in the market that may distort the prices. 
  8. 8.  The separation of management and the ownership of the firm creates an agency problem. Managers may make decisions that are not consistent with the goal of maximizing shareholder wealth.  Agency conflict is reduced through monitoring (ex. Annual reports), compensation schemes (ex. stock options), and market mechanisms (ex. Takeovers)
  9. 9.    Actively manages the financial affairs of any type of business, whether private or public, large or small, profit-seeking or not-for-profit. Important roles in making decision in a company such as: › Where to invest? (Capital budgeting) › How to raise money to fund the investment? (Capital structure) › How to manage cash flows from daily operations? (Working capital) The responsibilities of a financial managers including: › Planning and forecasting › Investment and financing decisions › Controlling and coordinating › Transaction in the financial markets › Risk management
  10. 10. Business Forms Sole Proprietorship Partnership Corporation
  11. 11.  Business owned by an individual  Owner maintains title to assets and profits  Unlimited liability  Termination occurs on owner’s death or by owner’s choice
  12. 12.  Two or more persons come together as co-owners  General Partnership: All partners are fully responsible for liabilities incurred by the partnership.  Limited Partnerships: One or more partners can have limited liability, restricted to the amount of capital invested in the partnership. There must be at least one general partner with unlimited liability. Limited partners cannot participate in the management of the business and their names cannot appear in the name of the firm.
  13. 13.  Legally functions separate and apart from its owners  Corporation can sue, be sued, purchase, sell, and own property Owners (shareholders) dictate direction and policies of the corporation, oftentimes through elected board of directors.  Shareholder’s liability is restricted to amount of investment in company  Life of corporation does not depend on the owners … corporation continues to exist through easy transfer of ownership  Taxed separately 
  14. 14.  Benefits: Limited liability, Easy to transfer ownership, Easier to raise capital, Unlimited life (unless the firm goes through corporate restructuring such as mergers and bankruptcies)  Drawbacks: No secrecy of information, maybe delays in decision making, Greater regulation, double taxation.
  15. 15. WRMAS 17
  16. 16.  Maximize PROFIT  Maximize SHAREHOLDER WEALTH
  17. 17.  Many people think the goal is to maximize profits.  However, profit maximization goal is unclear about the time frame over which profits are to be measured. Would this mean short-term profit, or long-term profit?  It is easy to manipulate the profits through various accounting policies.  Profit maximization goal ignores risk and timing of cash flows.
  18. 18.   The goal of the firm is to create value for the firm’s owners (shareholders)  Maximize shareholder wealth. Shareholder wealth is measured by share prices. Thus, This is equivalent to saying the goal is to maximize the price of common stock!
  19. 19. Financial markets play a critical role in capitalist economy. Financial markets help facilitate the transfer of funds from “saving surplus” units to “saving deficit” units i.e. transfer money from those who have the money to those who need it.  Three ways to transfer capital in the economy: 
  20. 20. The 2 key financial markets are the MONEY MARKET and the CAPITAL MARKET.  Money Market › Market for short-term debt instruments (maturity < 1 year). Examples: Treasury bills (issued by federal government), commercial paper, negotiable CDs, bankers’ acceptances.  Capital Market › Market for long-term financial securities (maturity > 1 year). Examples: Corporate Bonds, Common stocks, Treasury Bonds, term loans and financial leases.
  21. 21.  Primary Market (initial issue) • Market in which new issues of a securities are sold to initial buyers. This is the only time the issuing firm ever gets any money for the securities. • Example: Google raised $1.76 billion through sale of shares to public in August 2004. • Seasoned Equity Offering: Sale of additional shares by a company whose shares are already traded in the secondary market. • Example: Google raised $4.18 billion in September 2005.  Secondary Market (subsequent trading) • Market in which previously issued securities are traded. The issuing corporation does not get any money for stocks traded on the secondary market. • Example: Trading among investors today of Google stocks.
  22. 22.  Public Offering – Both individuals and institutional investors have the opportunity to purchase securities. The securities are initially sold by the managing investment bank firm. The issuing firm never actually meets the ultimate purchaser of securities.  Initial Public Offering – It is a type of public offering. The first time a company issues its stock.  Private Placement – The securities are offered and sold to a limited number of investors.