Financial Management

FIN 534 An Overview of Financial Management and the Financial Environment

Topics
The five-minute MBA The corporate life cycle The primary objective of the corporation: value maximization An overview of the capital allocation process Financial securities The cost of money Financial institutions Financial markets Trading procedures in financial markets Types of stock market transactions The secondary stock markets Stock market returns The global economic crisis The big picture and eresources

The Five-Minute MBA

Skilled personnel Strong relationships
Suppliers Customers

The Corporate Life Cycle

Proprietorship Partnership Corporation
IPO

The Primary Objective of the Corporation: Value Maximization

Market = intrinsic value? Maximize shareholder wealth = increase value of the firm
Increase size of expected cash flows Decrease risk

FCF = sales-revenues-operating costsoperating taxes-required new investment in operating capital

The Primary Objective of the Corporation: Value Maximization

Required rate of return = WACC Value= FCF1/(1+WACC)+ FCF2/(1+WACC)2+ FCF3/(1+WACC)3+...+ FCF/(1+WACC)

An Overview of the Capital Allocation Process

CYU

Financial Securities
Debt
Money market Capital market

Equity
Residual claim

Preferred stock-blend of debt and quity. Derivatives

Derived value

Securitization

The Cost of Money

Debt cost = interest rate Equity cost dividends plus capital gains Factors that impact the cost of money
Production opportunities Preference for consumption Risk Inflation

Financial Institutions
Investment banks Financial intermediaries
S&Ls MSBs Commercial banks

Credit unions

Financial Markets
Physical asset markets
Wheat Autos Real estate

Financial asset markets

Stocks Bonds Mortgages

Money markets Capital markets Mortgage markets World, national, regional and local markets Primary markets Private markets

CYU

Trading Procedures in Financial Markets

Physical location exchange

NYSE CBOT Tokyo Stock Exchange

Nasdaq linked computer system Matching of orders between buyers and sellers

Types of Stock Market Transactions

IPO Seasoned equity offerings Secondary market transactions

The Secondary Stock Markets

NYSE Nasdaq

Stock Market Returns

1968 -2008 average annual total stock market return = 10.6% Considerable annual variation U.S. stocks = 40% of the worlds total U.S. investors also hold foreign stocks

The Global Economic Crisis

Many factors caused the crisis Lack of due diligence Securitization Sub-prime mortgages Low interest rates over a prolonged period

The Big Picture and e-Resources

Managers prime focus increase the intrinsic value of the firm Intrinsic value = Present value of expected FCFs discounted at WACC

CYU

Summary
The five-minute MBA The corporate life cycle The primary objective of the corporation: value maximization An overview of the capital allocation process Financial securities The cost of money Financial institutions Financial markets Trading procedures in financial markets Types of stock market transactions The secondary stock markets Stock market returns The global economic crisis The big picture and eresources