analisis kewangan

Chapter 1

Concept of Managerial Finance

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-2

Learning Goals

1. Define finance, its major areas and opportunities available in this field.

2. Identify the primary activities of the financial manager.


What is Finance?

• Finance can be defined as the art and science of managing money.

• Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals, businesses, and governments.


Major Areas & Opportunities in Finance: Financial Services

• Financial Services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and government.

• Career opportunities include banking, personal financial planning, investments, real estate, and insurance.


Major Areas & Opportunities in Finance: Managerial Finance

• Managerial finance is concerned with the duties of the financial manager in the business firm.

• The financial manager actively manages the financial affairs of any type of business, whether private or public, large or small, profit-seeking or not-for-profit.

• They are also more involved in developing corporate strategy and improving the firm’s competitive position.


Investment Year 1 Year 2 Year 3 Total (years 1-3)

Rotor 1.40$ 1.00$ 0.40$ 2.80$

Valve 0.60$ 1.00$ 1.40$ 3.00$

Earnings per share (EPS)

Which Investment is Preferred?

Goal of the Firm: Maximize Profit???

• Profit maximization fails to account for differences in the level of cash flows (as opposed to profits), the timing of these cash flows, and the risk of these cash flows.


Share Price = Future Dividends

Required Return

level & timing of cash flows

risk of cash flows

Goal of the Firm: Maximize Shareholder Wealth!!!

• Why?

• Because maximizing shareholder wealth properly considers cash flows, the timing of these cash flows, and the risk of these cash flows.

• This can be illustrated using the following simple stock valuation equation:


Goal of the Firm: Maximize Shareholder Wealth!!! (cont.)

• The process of shareholder wealth maximization can be described using the following flow chart:


Financial Institutions & Markets: Financial Institutions

• Financial institutions are intermediaries that channel the savings of individuals, businesses, and governments into loans or investments.

• The key suppliers and demanders of funds are individuals, businesses, and governments.

• In general, individuals are net suppliers of funds, while businesses and governments are net demanders of funds.


Financial Institutions & Markets: Financial Markets

• Financial markets provide a forum in which suppliers of funds and demanders of funds can transact business directly.

• The two key financial markets are the money market and the capital market.

• Transactions in short term marketable securities take place in the money market while transactions in long-term securities take place in the capital market.


Financial Institutions & Markets: Financial Markets (cont.)

• Whether subsequently traded in the money or capital market, securities are first issued through the primary market.

• The primary market is the only one in which a corporation or government is directly involved in and receives the proceeds from the transaction.

• Once issued, securities then trade on the secondary markets such as the New York Stock Exchange or NASDAQ.


The Relationship between Financial Institutions and Financial Markets


The Money Market

• The money market exists as a result of the interaction between the suppliers and demanders of short-term funds (those having a maturity of a year or less).

• Most money market transactions are made in marketable securities which are short-term debt instruments such as T-bills and commercial paper.

• Money market transactions can be executed directly or through an intermediary.


The Money Market (cont.)

• The international equivalent of the domestic (U.S.) money market is the Eurocurrency market.

• The Eurocurrency market is a market for short-term bank deposits denominated in U.S. dollars or other marketable currencies.

• The Eurocurrency market has grown rapidly mainly because it is unregulated and because it meets the needs of international borrowers and lenders.


The Capital Market

• The capital market is a market that enables suppliers and demanders of long-term funds to make transactions.

• The key capital market securities are bonds (long-term debt) and both common and preferred stock (equity).

• Bonds are long-term debt instruments used by businesses and government to raise large sums of money or capital.

• Common stock are units of ownership interest or equity in a corporation.


Question

Would it be better for a company to invest

$100,000 in a product that would return a total

of $200,000 after one year, or one that would

return $220,000 after two years?

The Role of Time Value in Finance

• Most financial decisions involve costs & benefits that are spread out over time.

• Time value of money allows comparison of cash flows from different periods.


Answer

It depends on the interest rate!

The Role of Time Value in Finance (cont.)• Most financial decisions involve costs &

benefits that are spread out over time.

• Time value of money allows comparison of cash flows from different periods.

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analisis kewangan