Finance is the study of how people allocate scarce resources over time. It involves evaluating uncertain cash flows probabilistically and making investment and financing decisions. The goal of corporate finance is to maximize shareholder wealth by making optimal investment and financing decisions. This involves choosing investments that earn returns above the cost of capital and using a mix of financing that minimizes risk and cost. Key measures include economic value added and net present value. The finance function exists to transform assets and create value through financial contracting and markets.
2. What is finance?
I am saving for retirement. Should I use a
pension fund, mutual fund, direct stock market
investment ?
I want that new car. Should I use my cash
saving, lease, borrow?
Which is the best way to pay for my holidays, for
my house?
I’m thinking about starting a new business. Will
it reward me adequately?
Marocco has asked for major project financing.
Should my organization provide the funds?
3. Why study finance?
To manage your personal resources
To deal with the world of business
To pursue interesting and rewarding career
opportunities
To make informed public choices as a citizen
For the intellectual challenge
5. Introduction Surplus Spending
Unit
Has more cash income flow than expenditure on
consumption and real investments in a period of
time. The surplus is then allocated to the
financial sector.
Other terms for surplus unit are saver, lender,
buyer of financial assets, financial investor,
supplier of loanable funds, buyer of securities.
The surplus unit may buy financial assets, hold
more money, or pay off financial liabilities
issued earlier when in a deficit situation
The household and foreign sectors are usually a
surplus sector
6. Introduction:Deficit Spending Unit
Has more expenditures on consumption and real goods (investment) in the real sector
than income
during a period of time
The deficit unit must participate (borrow) in the financial sector to balance cash
inflows with
outflows
Other terms for deficit expending unit are borrower, demander of loanable funds, and
seller
of securities.
The deficit spending unit (DSU) may issue financial liabilities, reduce money balances,
and sell
financial assets acquired previously when in a surplus situation
7. Introduction: Financial Claims
Contracts related to the transfer of funds from surplus to deficit budget units.
Financial claims are also called financial assets and liabilities, securities, loans,
and financial investments.
For every financial asset, there is an offsetting financial liability.
Total receivable equal total payable in the financial system
Loans outstanding match borrowers liabilities.
Financial markets offer opportunity for : Financing for DSUs (primary)
Financial investing for SSUs (primary and secondary) ( Surplus spending units) :
Providing liquidity via trading financial claims in secondary markets
8. What is finance? Defining Finance
Finance is analytical.
Finance is based on economic principles.
Finance uses accounting information as an input
for decision-making.
Finance is international in perspective.
Finance is constantly changing.
Finance is the study of how to invest and raise
money productively
Finance is the study of how people allocate
scarce resources over time
costs and benefits are distributed over time
but the actual timing and size of future cash flows are often known only probabilistically
Understanding finance helps you evaluate these uncertain cash flows
http//garnet.acns.fsu.edu/ppeters/fin3403/
9. When implementing decisions, people make use
of
the Financial System which can be defined as the
set of markets and other institutions used for
financial contracting and exchange of assets and
risks
10. The Value Creation Function of
Finance
•The practice of finance exists for the creation
of value.
•Financial contracting brings about the
substitution of real wealth (i.e. real business
assets) for financial wealth (i.e. securities)
Investing in financial securities has better
attributes that in real assets. Value is created
in the real assets held by businesses, and then
transmitted into the value of financial wealth
issued by businesses and held by investors.
11. Finance is the process of transforming
existing
assets into new, contractual forms, as well
as
the analytical techniques needed to support
this, process, for the purpose of wealth
creation in modern, capitalistic economies.
12. Defining Finance the three
primary areas of finance
Financial management (Corporate finance) deals with how firms raise and use funds
to make
short-term and long-term investments.
Investment deals with how the securities markets work and how to evaluate and
manage investments in stocks and bonds.
Financial Markets and Institutions includes the study of the banking system and
markets.
13. Corporate Finance the financial
function
Corporations face two broad financial questions
- What investments should the firm make?
- How should it pay for those investments?
Financial managers are concerned with
Investment Decisions (use of funds)
The buying, holding or selling of types of assets
Financing Decisions (acquisitions of funds)
14. The Financial objective value
creation
Goal of management maximize the economic well-
being, or wealth, of the owners (current
shareholders)
Target maximize the price of the stock Share price
today Present value of all future
expected dividends at required return.
15. IntroductionFinancial Claims
Contracts related to the transfer of funds from surplus to deficit budget units
Financial claims are also called financial assets and liabilities, securities, loans, and
financial
investments.
For every financial asset, there is an offsetting financial liability.
Total receivable equal total payable in the financial system
Loans outstanding match borrowers liabilities
16. IntroductionFinancial Claims
Financial markets offer opportunity for
Financing for DSUs (primary)
Financial investing for SSUs (primary and
secondary)
Providing liquidity via trading financial claims
in secondary markets
17. IntroductionReal Financial assets
Assets any possession that has value in an exchange
tangible value depends on particular physical properties (reproducible and non-
reproducible)
intangible legal claims to some future benefit. Financial assets
18. IntroductionFinancial assets main
properties
Main properties of financial assets
Rate of return (R) expected return
Risk (r) credit risk, market risk
Liquidity (L) how much sellers stand to lose if they wish to sell immediately against
engaging in
a costly and time-consuming search.
19. Defining Finance
Finance is analytical.
Finance is based on economic principles.
Finance uses accounting information as an input
for decision-making.
Finance is international in perspective.
Finance is constantly changing.
Finance is the study of how to invest and raise
money productively
20. Defining Finance
Finance is the study of how people allocate
scarce resources over time
costs and benefits are distributed over time
but the actual timing and size of future cash
flows are often known only probabilistically
Understanding finance helps you evaluate these
uncertain cash flows
21. Defining Finance
When implementing decisions, people make use of the Financial System which can be
defined as the set of markets and other institutions used for financial contracting and
exchange of assets and risks
22. Financial theory consists of the set of concepts that help
to organize ones
thinking about how to allocate resources over time
the set of quantitative models used to help evaluate
alternatives, make decisions, and
implement them These concepts and models apply at all
levels and scales of decision making
23. The Value Creation Function of
Finance
The practice of finance exists for the creation f value
Financial contracting brings about the substitution of real wealth (i.e. real business
assets) for financial wealth (i.e. securities)
Investing in financial securities has better attributes that in real assets. Value is
created
in tthe real assets held by businesses, and then transmitted into the value of financial
wealth
issued by businesses and held by investors.
24. Finance is the process of transforming
existing
assets into new, contractual forms, as
well as
the analytical techniques needed to
support this
process, for the purpose of wealth
creation in
modern, capitalistic economies.
25. Corporate Finance the financial
function
Corporations face two broad financial questions
- What investments should the firm make?
- How should it pay for those investments?
Financial managers are concerned with
Investment Decisions (use of funds)
The buying, holding or selling of types of assets
Financing Decisions (acquisitions of funds)
26. The Financial objective value
creation
Goal of management maximize the economic
well-being, or wealth, of the owners (current
shareholders)
gt maximize the price of the stock
Share price today Present value of all future
expected dividends at required return
27. Financial managers must create or generate value
for their shareholders.
Economic Value Added (EVA) is a measure of a
company's financial performance based on the
residual wealth calculated by deducting cost of
capital from its operating profit (adjusted for
taxes on a cash basis).
The formula for calculating EVA is as follows
EVA Net Operating Profit After Taxes -
(Capital Cost of Capital)
28. Financial main principles
Rational Financial behavior
Risk aversion
Budgetary diversification
Existence of two parts in all financial transaction
Measurement by cash flows Signaling and informative asymmetry
Efficiency of financial markets
Direct relation of risk and return
Existence of valuable ideas
Financial conduct initiative
The Time Value of the money and value additivity.
29. Main programmes in finance
Managements of Investments- Capital Budgeting.
Capital Structure and Dividend Policy.
Market Efficiency.
The Capital Asset Pricing Model.
Options Theory
Agency Theory
Financial Planning
Small Firms
30. Corporate Finance
Introduction to Corporate finance management
Mergers and acquisitions
Cost of capital and capital structure
Strategy and tactics of financing decisions -
investment decision making
Capital Restructuring and Multinational Fin.
Management
Lease Financing and Working Capital Management
Risk Management and Real Options
