Lecture 1(Complete)

8/10/2019 Lecture 1(Complete)

1/40

FINANCIAL MANAGEMENT

Part 1: An introduction to finance

Lecture 1: What is finance?


2/40


1.1. Introduction

1.2. Defining finance

1.3. The Firm: a sistemic approach

1.4. Corporate Finance: the financia function

1.!. The financia o"#ecti$e: $aue creation

1.%. Financia main principes

1.&. Finance: historic e$oution

1.'. (ain programmes in Finance


3/40


1.1. Introduction )1*

I am saving for retirement. Sou!d I use a "ension fund#mutua! fund# direct stoc$ mar$et investment %

I &ant tat ne& car. Sou!d I use m' cas saving# !ease#

(orro&%)ic is te (est &a' to "a' for m' o!ida's# for m'ouse%

I*m tin$ing a(out starting a ne& (usiness. )i!! itre&ard me ade+uate!'%

Marocco as as$ed for ma,or "ro,ect financing.

Sou!d m' organi-ation "rovide te funds%


4/40


1.1. Introduction )2*

Wh+ stud+ finance?

To manage 'our "ersona! resources

To dea! &it te &or!d of (usiness

To "ursue interesting and re&arding careero""ortunities

To ma$e informed "u(!ic coices as a citi-en

For te inte!!ectua! ca!!enge


5/40

/ouseo!d

0usiness Firms

Government

Foreign Sector


Introduction: (acroeconomic,-pending -ectors

S2PLS SPEN3INGNITS

3EFICIT SPEN3ING

NITS


6/40

/as more cas income f!o& tan e4"enditureon consum"tion and rea! investments in a

"eriod of time. Te sur"!us is ten a!!ocated tote financia! sector.

5ter terms for sur"!us unit are saver# !ender#(u'er of financia! assets# financia! investor#su""!ier of !oana(!e funds# (u'er of securities.


1.1. Introduction:-urpus -pending nit )1*


7/40

Te sur"!us unit ma' (u' financia! assets#o!d more mone'# or "a' off financia!

!ia(i!ities issued ear!ier &en in a deficitsituation

Te ouseo!d and foreign sectors areusua!!' a sur"!us sector


1.1. Introduction:-urpus -pending nit )2*


8/40

/as more e4"enditures on consum"tion andrea! goods 6investment7 in te rea! sector

tan income during a "eriod of time

Te deficit unit must "artici"ate 6(orro&7 in

te financia! sector to (a!ance cas inf!o&s&it outf!o&s


1.1. Introduction:Deficit-pending nit )1*


9/40

5ter terms for deficit e4"ending unit are

(orro&er# demander of !oana(!e funds# andse!!er of securities.

Te deficit s"ending unit ma' issue

financia! !ia(i!ities# reduce mone' (a!ances#and se!! financia! assets ac+uired "revious!'&en in a sur"!us situation


1.1. Introduction:Deficit-pending nit )2*


10/40

Contracts re!ated to te transfer of funds from

sur"!us to deficit (udget units Financia! c!aims are a!so ca!!ed financia! assets and

!ia(i!ities# securities# !oans# and financia!investments.

For ever' financia! asset# tere is an offsettingfinancia! !ia(i!it'.

Tota! receiva(!e e+ua! tota! "a'a(!e in te financia! s'stem Loans outstanding matc (orro&ers* !ia(i!ities


1.1. Introduction:Financia Caims )1*


11/40

Financia! mar$ets offer o""ortunit' for:

8Financing for 3Ss 6"rimar'7

8Financia! investing for SSs 6"rimar' and

secondar'78Providing !i+uidit' via trading financia! c!aims

in secondar' mar$ets


1.1. Introduction:Financia Caims )2*


12/40

T/0 FLW F FD- DI5(

Deficit SpendingUnit (DSU)

Surplus SpendingUnit (SSU)

FundsFunds

Financia! Assets 9 Financia! C!aims


13/40

T/0 FLW F FD- DI5(



FundsFunds

Financia! Assets 9 Financia! C!aims

0orro&erdemander of !oana(!e funds

se!!er of securities

Saver# !ender

(u'er of financia! assetsfinancia! investorsu""!ier of !oana(!e funds

(u'er of securities.


14/40

Assets: an' "ossession tat as va!ue in ane4cange

8tangi(!e: va!ue de"ends on "articu!ar "'sica!"ro"erties 6re"roduci(!e and nonre"roduci(!e7

8intangi(!e: !ega! c!aims to some future (enefit.Financia! assets


1.1. Introduction:5ea 6 Financia assets


15/40

Main "ro"erties of financia! assets

82ate of return 627: e4"ected return82is$ 6r7: credit ris$# mar$et ris$

8Li+uidit' 6L7: o& muc se!!ers stand to !ose ifte' &is to se!! immediate!' against engaging ina cost!' and timeconsuming searc 6;.To(in7


1.1. Introduction:Financia assets: main properties


16/40

T/0 FLW F FD- DI5(

DIRECT FINANCING (Markets)



INDIRECT FINANCIAL INVESTMENT

ORINTERMEDIATION FINANCING

BrokersDealers

Intermediaries

FundsFunds

Funds Funds


17/40

T/0 FLW F FD- DI5(

DIRECT



INDIRECT

BrokersDealers

Intermediaries

FundsFunds

Funds Funds

Direct Financial AssetsPurchase

Indirect Financial AssetsPurchase

Direct Financial AssetsIssue

Direct Financial AssetsIssue


18/40


1.2. Defining Finance

)at is Finance%

T'"es of Finance definitions8Lac$ of an' s"ecific definition82aising and s"ending funds

8Economic decisions &it a time com"onent8Micro


19/40

Finance is ana!'tica!. Finance is (ased on economic "rinci"!es.

Finance uses accounting information as anin"ut for decisionma$ing.

Finance is internationa! in "ers"ective.

Finance is constant!' canging. Finance is te stud' of o& to invest and

raise mone' "roductive!'



http://garnet.acns.fsu.edu/~ppeters/n3403/


20/40

Finance is te stud' of o& "eo"!e a!!ocatescarce resources over time8costs and (enefits are distri(uted over time8(ut te actua! timing and si-e of future cas

f!o&s are often $no&n on!' "ro(a(i!istica!!'

nderstanding finance e!"s 'ou eva!uatetese uncertain cas f!o&s



0odie and Merton


21/40

)en im"!ementing decisions# "eo"!e ma$euse of teFinancial System&ic can (edefined as the set of markets and otherinstitutions used for financial contracting

and exchange of assets and risks



0odie and Merton


22/40

Financia! teor' consists of:8te set of conce"ts tat e!" to organi-e one*s

tin$ing a(out o& to a!!ocate resources overtime

8te set of +uantitative mode!s used to e!"eva!uate a!ternatives# ma$e decisions# andim"!ement tem

Tese conce"ts and mode!s a""!' at a!! !eve!s andsca!es of decision ma$ing



0odie and Merton


23/40

A (asic tenet of finance is tat te e4istence

of economic organi-ations 6e.g. firms andgovernments7 faci!itate te satisfaction of"eo"!e*s consumption preferences



0odie and Merton


24/40

Finance Teor' is te stud' of te (eaviour ofindividua!s in te intertemporaa!!ocation 6overtime7 of teir resources in an uncertainenvironment# and te stud' of te function ofeconomic institutions and mar$ets in ma$ing tese

a!!ocations "ossi(!e.


1.2. Defining Finance: Definition 1

Economa Financiera

Marn, Jos M. / Rubio, Gonzalo

Antoni Bosch, Editor, Barcelona, 2!


25/40

Te "ractice of =finance> e4ists for tecreation of value

Financia! contracting (rings a(out tesu(stitution of rea! &ea!t 6i.e. rea!

(usiness assets7forfinancia! &ea!t 6i.e.

securities7 Investing in financia! securities as (etterattri(utes tat in rea! assets. ?a!ue is created in tte rea! assetse!d (' (usinesses# and ten transmitted into te va!ue of

financia! &ea!t issued (' (usinesses and e!d (' investors.


1.2. Defining Finance: a ne7 paradigm. Te

?a!ue Creation Function of Finance

Norton ' Scott# =A ne& Paradigm: te va!ue creationfunction of finance># ,anuar' @1


26/40

Finance is te "rocess of transforming

e4isting assets into ne contractua! forms#as &e!! as te ana!'tica! tecni+ues neededto su""ort tis "rocess# for te "ur"ose of

&ea!t creation in modern# ca"ita!isticeconomies.


1.2. Defining Finance: a ne7 paradigm.

Definition 2

Norton ' Scott# =A ne& Paradigm: te va!ue creationfunction of finance># ,anuar' @1


27/40

Financia! management 6Cor"orate finance7 dea!s &ito& firms raise and use funds to ma$e sortterm and

!ongterm investments. Investment dea!s &it o& te securities mar$ets

&or$ and o& to eva!uate and manage investments instoc$s and (onds.

Financia! Mar$ets and Institutions inc!udes te stud'of te (an$ing s'stem and mar$ets.


1.2. Defining Finance: the three primar+ areas of finance

Peterson and Fa(o--i


28/40

FINANCIAL MANAGEMENT

Part 1: An introduction to finance

Lecture 1: What is finance?)II*


29/40

Lecture 1: What is finance? )II*

1.1. Introduction

1.2. Defining finance


1.4. Corporate Finance: the financia function

1.!. The financia o"#ecti$e: $aue creation

1.%. Financia main principes

1.&. Finance: historic e$oution

1.'. (ain programmes in Finance


30/40

Su(sistema de

recursos umanos

Su(sistema de

direcciBn ' gestiBn

Su(sistema de

direcciBn ' gestiBn

Su(sistema

comercia!

Su(sistema de

o"eraciones

3inero

3inero

P

ersona!

Person

a!

0ienes ' servicios

Persona!

Persona!

Goods and

Services

2esourses E4"enses Sa!esIncomes

Su(sistema de

recursos umanos

/uman 2esources

Su(s'stem

Su(sistema de

direcciBn ' gestiBn

Management

Su(s'stem

Su(sistema de

direcciBn ' gestiBn

Finance Su(s'stem

Commercia!

Su(s'stem

5"erations

Su(s'stem

Funds

Funds

/

uman

resources

/u

man

reso

urce

s

Goods and Services

Personne!

/uman 2esources

2esourses




31/40


32/40


1.!. Corporate Finance: the financia function

Cor"orations face t&o (road financia! +uestions: )at investments sou!d te firm ma$e% /o& sou!d it "a' for tose investments%

Financia managers are concerned 7ith :

In$estment Decisions6use of funds7:

8 Te (u'ing# o!ding or se!!ing of t'"es of assets

Financing Decisions6ac+uisitions of funds7


33/40


1.%. Corporate Finance: the financia function

FICIL(0(0T

)C55T0

FIC0*

r ) r ; < *


34/40


1.&. The Financia o"#ecti$e: $aue creation

Goa! of management: ma4imi-e te economic &e!!(eing# or&ea!t# of te o&ners 6current sareo!ders7

9 ma4imi-e te "rice of te stoc$

Sare "rice toda' 9 Present va!ue of a!! future e4"ecteddividends at re+uired return

=

+

=

1 1.ma4.Pr..

i

i

i

k

diceShareMax


35/40


1.'. The Financia o"#ecti$e: $aue creation

Financia! managers must create or generate va!ue for teirsareo!ders.

Economic ?a!ue Added 6E?A7 is a measure of a com"an'sfinancia! "erformance (ased on te residua! &ea!t ca!cu!ated ('deducting cost of ca"ita! from its o"erating "rofit 6ad,usted forta4es on a cas (asis7.

Te formu!a for ca!cu!ating E?A is as fo!!o&s:

E?A 9 Net 5"erating Profit After Ta4es 6Ca"ita! H Cost ofCa"ita!7


36/40


1.>. Financia main principes

2ationa! Financia! (eavior 2is$ aversion 0udgetar' diversification

E4istence of t&o "arts in a!! financia! transaction Measurement (' cas f!o&s Signa!ing and informative as'mmetr' Efficienc' of financia! mar$ets

3irect re!ation of ris$ and return E4istence of va!ua(!e ideas Financia! conduct initiative Te Time ?a!ue of te mone' and va!ue additivit'.


37/40


1.1. Finance: historic e$outionPrinci"!es of centur' :

0eginning of te researc in finance

E?ENTS

Finance at te "resent

E4"ansion of te ears @Te @J CrisesEconom' mi!itar' of te KE4"ansion of te

Crises of te "etro!eum of te


38/40

Modern

Approach

1900-

1950-

1970-

1980-

1990-

Classical Approach

APT Model(Ross, 1970)

Options al!ation Models ("lac# $ %choles, 197&)

Port'olio selectionTheor$ (Mar#oit,195*,1959)

CAPM (idenin+ and re'or!lation)

i.idends Polic$ (Modi+liani, Miller,19/&)

Capital Assets Pricin+

Model (CAPM) (%harpe,19/&-, intner, 19/5)

23cientMar#etTheor$

(4aa,1970)

4inancial %tr!ct!re(Modi+liani, Miller,1958)

A+enc$

Theor$

5n'or,a

tion

Theor$

4inancial

nno.ation

Methods 6ased on 4!$ %ets Theor$

(a!'ann $ il, 198/-87)

Chaos Theor$,on inear $naics

Mar#ets 23cienc$

Paradi+,$e

ars70

"eha.ioral :nance

*000-


1.1. Finance: historic e$oution


39/40


1.11. (ain programmes in finance

Managements of Investments Ca"ita! 0udgeting. Ca"ita! Structure and 3ividend Po!ic'.

Mar$et Efficienc'. Te Ca"ita! Asset Pricing Mode!. 5"tions Teor' Agenc' Teor' Financia! P!anning Sma!! Firms


40/40

Oid&e!!# Peterson# 0!ac$&e!!# )id(ee:FinancialInstitutions, Markets, and Money# Eigt Edition# ;on )i!e'

Sons# @ Fa(o--i# Modig!iani: Capital Markets. Institutions and

Instruments. Prentice /a!!# @

0odie# Qvi and Merton# 2o(ert C.:Finance. Prentice /a!!#1JJJ

Pame!a P. Peterson and Fran$ Fa(o--i:Financial Managementand Analysis# @nd Edition# ;on )i!e' Sons# @


8i"iograph+

Documents

Lecture 1(Complete)