Financial Management

1

• Every decision that a business makes has financial effects. So everything that a business does fits under the heading of finance.

• E.g. Pricing and advertising for a new product (Marketing)

What is financial management?

• To give you the capacity to understand the theory and apply, in real world situations, the techniques that have been developed in corporate finance. So use the techniques to understand, analyze, and solve problems.

• To give you the big picture of corporate finance so that you can understand how things fit together.

Course Objectives

• We will use firm to refer to any business, large or small, manufacturing or service, private or public. Thus, a corner grocery store and Microsoft are both firms.

• The firm’s investments are generically termed assets.

The firm

A firm can raise funds (get money) from investors or financial institutions by promising investors a fixed claim (interest payments) on the cash flows generated by the assets, with a limited or no role in the day-to-day running of the business. E.g. bank loans, bonds

Debt

• A Bond is simply an IOU (I owe you) given from the borrower to the lender. It allows companies and governments to get loans directly from the public.

• https://www.youtube.com/watch?v=7GSXbgfKFWg

• http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=dis

Bonds

• A bond is a loan made by the bondholder to the company under the heading of debt. Bonds are sold to large investors with the help of investment banks through auctions.  Afterwards they can be traded on the secondary markets. The price of a bond can go up or down depending on the supply and demand for the bond in the secondary market, however the price changes at a much lower rate than stocks. Bondholders recieve yeild on the bond, receiving back more money in the future than they invest now. A bond may or may not have coupon payments every year.

Bond - Definition

• Yield to maturity - an estimate of what an investor will receive if the bond is held to its maturity date

• Coupon - the bond interest rate fixed at issuance

• Price – the amount the bond is being sold for in the market as a percentage of its face value.

Bonds Vocabulary

• Alternatively, a firm can offer a share of the profits (i.e., investors can get what is left over after the interest payments have been made) and a much greater role in the operation of the business. E.g. owners money, shares

Equity

• A stock is a part ownership of the company and is under the heading of equity. Stock is first sold to the public with the help of investment banks through an initial public offering (IPO). Afterwards is traded on secondary markets e.g New York stock exchange. Stockholders can vote at the annual general meeting (AGM). The price of stock can go up or down depending on the supply and demand for the stock in the secondary market. If the company makes a profit it might share some of the profits with the stockholders as dividends.

Stock - Definition

• http://www.investopedia.com/video/play/introduction-balance-sheet/

Accounting Balance Sheet

Financial view of the firm

First Principles13

• We wouldn’t invest money for a 9% return if the funds cost 10% to raise. Business people have known this for thousands of years.

Theme 1:Corporate financeis “common sense”

• It focuses on maximizing the value of the business.

• This allows us to use rules to make decisions to choose the right investment, the right funding and the right amount of cash to return to the owners.

Theme 2: Corporate financeis focused

Theme 3: Things change across the life-cycle of a

business

Theme 4: Corporate Finance is universal

• Almost every corporate disaster or bubble has its origins in breaking the principles

Theme 5: If you break the first principles you will pay the price