Documente Academic
Documente Profesional
Documente Cultură
OF
FINANCIAL MANAGEMENT
1
Course Content
y 1 Introduction to Finance
Topic 1. Finance. Overview of
Сorporate Financing Decisions. Capital Markets and
Financial Instruments.
y 2 Discounted Cash Flow and Present Value
Topic 2.
Concept.
y Topic 3. Valuing Debt and Equity Securities: Bond vs.
Stock
y Topic 4. Investment Evaluation. Capital Budgeting
Decisions.
y Topic 5. Risk and Return. Introduction to Portfolio
Theory.
y 6 Long-term
Topic 6. Long term Financial Decisions: Capital
Structure and Cost of Capital.
2
Course Assessment
Element Weight
g
1. In-class tests (2) 30%
2 Mid-term
2. Mid E
Exam 30%
3. Final Exam 40%
TOTAL 100%
3
Resource
y Required Textbook:
Brealey, Myer & Allen, Fundamentals of
C
Corporate
t Fi
Finance, 6-th
6 th ed.
d MMcGraw
G Hill,
Hill 2008
y Selected web sites:
◦ TheStreet.com at www.thestreet.com
◦ The CNN at www.money.cnn.com
◦ Yahoo finance at www.finance.yahoo.com
4
Lecture 1:
F d
Fundamentals
t l off Finance
Fi
5
Forms of Business Organization
Proprietorship
/ Sole S
Proprietor Partnership Corporation Corporation
Who own the
business? manager partners shareholders shareholders
Are owners &
managers
separate? no no yes sometimes
What is limited &
owners' unlimited unlimited unlimited limited
yes -
Are owners & corporate
business taxed no - individual no - individual income tax & no - individua
separately? income tax income tax individual tax income tax
6
Possible Goals of Corporation
y Maximize the earnings and earning
growth
y Maximize the market share
y Maximize EPS
y Maximize the shareholders’
shareholders wealth
Stock’s intrinsic
Stock’s market price
value
Market equilibrium:
Intrinsic value = stock price 8
Which Determines Shareholders’
Stock price
e W lth?
Wealth?
Stock
overvalued
Intrinsic value
S
Market price
p
Stock
undervalued
Time
9
9
Possible Goal of Corporation (cont.)
10
Agency Problem at Corporation
11
Financial Decisions at Corporation
y Financing decision
◦ How to acquire funds (form and amount of
financing the investment)
y Dividend decision
◦ How to distribute profit (how much to return to
shareholders)
12
Link between Investment, Financing
andd Di
Dividend
id d DDecisions
i i
13
Role of Financial Manager
2 Investments
2.Investments 1a. Raising
funds
Vi President
Vice P id t and d
Chief Financial Officer (CFO)
Treasurer Controller
y Accounting concepts
◦ Assets = Liabilities + Equity
x Real
R l assetst
x Financial assets
◦ Depreciation
16
Understanding Financial Terms
y Financial markets
◦ Primary vs. secondary market
◦ M
Money vs. capital
it l market
k t
◦ Organized vs. OTC
◦ Financial instruments
x Stock
x Bond
B d/D Debenture
b t
x Promissory note/bank bill
◦ Cost of capital/opportunity cost
17
Primary vs
vs. Secondary Markets
y Primary market – primary issues of securities
are sold, allows governments, banks,
corporations to raise money by directly selling
financial instruments to the public.
18
Money vs
vs. Capital Market
Money markets – short
short-term
term assets (maturity
less than 1 year) are traded:
Certificates of deposits (CDs)
Commercial papers (CPs)
Treasury bills
y Stocks
St k nott listed
li t d on the
th organized
i d exchanges
h
are traded in the over-the-counter (OTC)
market.
◦ facilitates secondary market transactions.
◦ no have a trading floor: buy/sell orders are
completed via telecommunications network
20
Financial Instruments
y By type of issuers:
◦ Government
◦ State
◦ Corporation
◦ Financial institution
y By maturity: short-term vs. long-term
y By type of yield:
◦ Dividend bearing: stock
◦ Discount debt: treasury bill
◦ Interest bearing: bond
y By level of risk
◦ Risk-free: T-bill
◦ Low risk: treasury note/bond
note/bond, blue chip stock
◦ High risk: junk bond, derivatives
21
Ratings
Moody’s S&P Meaning Expected return
Investment grade
Aaa AAA Best quality Lowest
Aa AA High quality Lower
A A Favorable Middle
Baa BBB Medium-grad Middle/Upper
Speculative grade
Ba BB Speculative element High
B B Small assurance of Higher
payments
Speculative grade
Caa CCC Poor standing, Default or Very high
danger of default
Ca CC Highly speculative
standing
C C Very speculative:
V l ti poor
prospects of attaining
investment standing
22
D In default
Tutorial
y Chapter 1:
◦ Self-test: 1.1, 1.2, 1.3
◦ Quiz:
Q i 1 1, 2
2, 3,
3 4
◦ Problems: 16, 18, 20
23