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FinanceFinance School of Management School of Management
FINANCEFINANCE
Zvi Bodie
Robert C. Merton
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FinanceFinance School of Management School of Management
About the instructors About the TA About the course About the requirements
– 20% assignment & class performance– 15% mid-term test– 65% final test
About the book and authors
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UESTCUESTC四川省精品课程
金融学基础 课程概况
课程性质: 学科基础课学时与学分: 64 学时, 4 学分上课时间: 周二、周四上午 3-4 节作业要求: 个人作业(英文)与小组作业
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UESTCUESTC四川省精品课程
金融学基础 考核方式
期末考试( 65% )
一页纸开卷
期中考试( 15% )
一页纸开卷 课堂表现 习题完成及答疑情况 小组作业情况 课程讲座表现 出勤表现
平时成绩( 20% )
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UESTCUESTC四川省精品课程
金融学基础 教材与作者
Zvi Bodie
Robert C. Merton
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FinanceFinance School of Management School of Management
Chapter 1: Chapter 1: What is Finance? What is Finance?
Objective• To Define Finance
• The Value of Finance
• Introduction to
the Players
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FinanceFinance School of Management School of Management
Chapter 1 ContentsChapter 1 Contents
Defining Finance Why Study Finance Household Finance Financial Decisions-Firms Forms of Business
Organization Separation of Ownership
and Management
The Goal of management Market Discipline-
Takeovers Role of the Financial
Specialists in a Corporation
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FinanceFinance School of Management School of Management
Defining FinanceDefining Finance
What do you know about ‘Finance’?
?
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FinanceFinance School of Management School of Management
Finance, as a scientific discipline, is the study of how to allocate scarce resources over time under conditions of uncertainty.
Present
Future
Future
Defining FinanceDefining Finance
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FinanceFinance School of Management School of Management
Analytical “Pillars” to FinanceAnalytical “Pillars” to Finance
Optimization over time Asset valuation Risk management
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FinanceFinance School of Management School of Management
Finance TheoryFinance Theory
consists of – a set of concepts that help to organize one’s
thinking about how to allocate resources over time,
– a set of quantitative models to help one evaluate alternatives, make decisions, and implement them.
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FinanceFinance School of Management School of Management
Financial SystemFinancial System
The financial system is defined as the set of markets and other institutions used for financial contracting and the exchange of assets and risks.
The ultimate function of the system is to satisfy people’s consumption preferences.
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FinanceFinance School of Management School of Management
Why Study Finance?Why Study Finance?
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FinanceFinance School of Management School of Management
Why Study Finance?Why Study Finance?
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FinanceFinance School of Management School of Management
Why Study Finance?Why Study Finance?
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FinanceFinance School of Management School of Management
Why Study Finance?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 To expand your mind
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FinanceFinance School of Management School of Management
Harry M. Markowitz (1927~)
Awarded to the 1990 Nobel Prize
Main Contribution:– The father of modern
portfolio theory
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FinanceFinance School of Management School of Management
William F. Sharpe (1934~)
Awarded to the 1990 Nobel Prize
Main Contribution:– Developing the Capital
Asset Pricing Model (CAPM) theory
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FinanceFinance School of Management School of Management
Merton H. Miller (1923~2000)
Awarded to the 1990 Nobel Prize
Main Contribution: – The M&M
(Modigliani-Miller) Theorem
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FinanceFinance School of Management School of Management
Robert C. Merton (1944~)
Awarded to the 1997 Nobel Prize
Main Contribution:– The pricing of options
and other derivatives
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FinanceFinance School of Management School of Management
Myron S. Scholes (1941~)
Awarded to the 1997 Nobel Prize
Main Contribution:– The pricing of options
and other derivatives
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FinanceFinance School of Management School of Management
Financial Decisions of HouseholdsFinancial Decisions of Households
Consumption and saving decisions Investment decisions Financing decisions Risk-management decisions
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FinanceFinance School of Management School of Management
Assets Personal investing & Asset allocation Liability, Debt Net Worth = Assets – Liabilities Consumption preferences, exogenous
and endogenous elements
Important TermsImportant Terms
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FinanceFinance School of Management School of Management
Financial Decisions of FirmsFinancial Decisions of Firms
Strategic planning & Capital budget decisions– What businesses to be in
– Identifying ideas for new investment projects
– Evaluating the projects, and deciding which ones to undertake
– Implementing them, a plan for acquiring assets and for training the personnel
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FinanceFinance School of Management School of Management
Financial Decisions of FirmsFinancial Decisions of Firms Financing (Capital structure) decision
– A feasible financing plan
– The decisions about how much debt and equity to have
– Wide range of financial instruments and claims
– A corporation’s capital structure determines who gets what shares of its cash flows, and partially determines who gets to control the company.
Working capital management decision– The day-to-day prosaic financial affairs of the business.
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FinanceFinance School of Management School of Management
Dividend decision– How much cash to distribute to shareholders
Risk-management Decision– How and on what terms should the firm seek to
reduce the financial uncertainties it faces?
Financial Decisions of FirmsFinancial Decisions of Firms
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FinanceFinance School of Management School of Management
Forms of Business OrganizationForms of Business Organization
A sole proprietorship (个体业主制)(个体业主制)– unlimited liability
A partnership (合伙制)(合伙制)– unlimited liability
– general partner & limited partner
A corporation (现代公司制)(现代公司制)– a legal entity distinct from its owners
– ownership, board of directors and limited liability
– public corporations & private corporations
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FinanceFinance School of Management School of Management
Quick CheckQuick Check
Is a corporation owned by a single person a sole proprietorship? Why?
In a corporation the liability of the single shareholder would be limited to the assets of the corporation.
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FinanceFinance School of Management School of Management
Separation of Ownership and ManagementSeparation of Ownership and Management
The owners of a firm delegate the responsibility of running the business to professional managers who may not own any shares.
Why? What? How?
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FinanceFinance School of Management School of Management
Reasons for Separation of Ownership and Reasons for Separation of Ownership and ManagementManagement
The owner need not have both the talents of a manager and the financial resources.
The need to pool resources to achieve an efficient scale of production.
The need of owners to diversify their risk in an uncertain economic environment.
Allowing for savings in the costs of information gathering.
The “learning curve” or “going concern” effect favors the separated structure.
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FinanceFinance School of Management School of Management
Separation of Ownership and ManagementSeparation of Ownership and Management
The corporate form is especially well suited to the separation of owners and managers because it allows relatively frequent changes in owners by share transfer without affecting the operations of the firm.
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FinanceFinance School of Management School of Management
Conflicts of InterestConflicts of Interest The separated structure creates the potential for a
conflict of interest between the owners and the managers.
An agency problem exists where the principal has to entrust their interests to an agent who acts on their behalf.
Contractual arrangements, incentive schemes, and monitoring are used to control principal‒agency conflicts.
The social cost for resolving the conflict.
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FinanceFinance School of Management School of Management
The Goal of ManagementThe Goal of Management
The difficulties of the goal of corporate management to serve the best interests of the shareholders.
To be feasible and effective, the right rule for the goal of management should be independent of who the owners are.
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FinanceFinance School of Management School of Management
Shareholder-Shareholder-Wealth-Maximization RuleWealth-Maximization Rule
An illustration: the decision between a risky investment and a safe one
The role of well-functioning capital markets The rule depends only upon
– the firm’s production technology– market interest rates– market risk premiums– security prices
The rule does not depend upon the risk aversion or wealth of the owners.
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FinanceFinance School of Management School of Management
Ambiguities of Profit-Maximization RuleAmbiguities of Profit-Maximization Rule Multi-periodic profits Uncertain future revenues or expenses An illustration
– Each of project A, B, and C require an initial outlay of $1 million.
– Project A will return $1.05 million one year from now and then over.
– Project B will last for two years, return nothing in the first year, and then $1.1 million two years from now.
– Project C will either pay $1.2 million or $0.9 million one year from now and then over.
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FinanceFinance School of Management School of Management
A Well-Functioning Stock MarketA Well-Functioning Stock Market
Implementation of the management goal and market-price information
The existence of an efficient stock market allows the manager to substitute one set of external information which is relatively easy to obtain‒ namely stock prices‒for another set which is virtually impossible to obtain‒information about the shareholders’ wealth, preferences, and other investment opportunities.
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FinanceFinance School of Management School of Management
Market Discipline: TakeoversMarket Discipline: Takeovers
The value of voting rights as a means of enforcement The mechanism of takeover (接管) for aligning
the incentives of managers with those of shareholders– The threat of a takeover and the subsequent
replacement of management provides a strong incentive for current managers (acting in their self-interest) to act in the interests of the firm’s current shareholders by maximizing market value.
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FinanceFinance School of Management School of Management
The Roles of Corporate Financial The Roles of Corporate Financial SpecialistsSpecialists
Financial executive‒a person with authority in the following functions:
VP Operations
Treasurer VP Financial Planning Controller
Chief Financial Officer VP Marketing
Chief Executive Officer
Board of Directors
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FinanceFinance School of Management School of Management
Role of the Financial ManagerRole of the Financial Manager
Financial
managerFirm's
operations
Financial
markets
(1) Cash raised from investors
(1)
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FinanceFinance School of Management School of Management
Financial
managerFirm's
operations
Financial
markets
(1) Cash raised from investors
(2) Cash invested in firm
(1)(2)
Role of the Financial ManagerRole of the Financial Manager
41
FinanceFinance School of Management School of Management
Financial
managerFirm's
operations
Financial
markets
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(1)(2)
(3)
Role of the Financial ManagerRole of the Financial Manager
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FinanceFinance School of Management School of Management
Financial
managerFirm's
operations
Financial
markets
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(1)(2)
(3)
(4a)
Role of the Financial ManagerRole of the Financial Manager
43
FinanceFinance School of Management School of Management
Financial
managerFirm's
operations
Financial
markets
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested (4b) Cash returned to investors
(1)(2)
(3)
(4a)
(4b)
Tax paid to Government
(5)
(5) Tax leakage
Role of the Financial ManagerRole of the Financial Manager
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FinanceFinance School of Management School of Management
Financial Functions in a CorporationFinancial Functions in a Corporation
Planning Provision of Capital Administration of Funds Accounting and Control Protection of Assets Tax Administration Investor Relations Evaluation and Consulting Management Information Systems
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FinanceFinance School of Management School of Management
Assignments
1, 3, 4, 6, 7 Team Work: 8