Finance and Financial Management

1
Finance and Financial Management

• Focuses on the acquisition, financing and
  management of assets.

2
Three Decision Areas

• Investment Decisions (What is the appropriate
  distribution of assets? What is an appropriate
  level of liquidity? What assets should be
  replaced, reduced or eliminated?)
• Financing Decisions (What is the appropriate mix
  of capital? How much should be paid out in
  dividends?)
• Asset Management Decisions (How should the firm
  best manage its assets?)

3
Board of Directors
Chief Executive Officer
Vice President Operations
Vice President Finance (CFO)
Vice President Marketing
TREASURER -Capital Budgeting -Cash
Management -Commercial Banking Investment
Banking Relationships -Financial
analysis -Investor Relations -Pensions
Mgmt -Insurance and Risk Management -Tax Analysis
CONTROLLER Cost Accounting Cost Management Data
Processing General Ledger Government
Reporting Internal Control Financial
Statements Budgets Forecasting
4
Time Value of Money
Simple Interest Interest that is paid on only
the original amount or principal. SI
P0(i)(n) Compound Interest Interest that is
paid on any previous interest earned as well as
on the principal or original amount.
5
Future Value - Compound Interest
FV1 P0(1i) FV2 FV1(1i) P0(1i) (1i)
P0(1i)2 FV3 FV2(1i) FV1(1i)(1i)
P0(1i)3 FVn P0(1i)n FVn P0(FVIFi,n)
Lets look at the tables
6
Present Value Calculation
PV0FVn1/(1i)n PV0FVn(PVIFi,n) iinterest
(discount rate) nnumber of periods
Calculate how much my promise of future money is
worth today.
7
Lets assume that interest rates are (and will
continue to be) 8, would you rather have 475
now or 700 in 5 years?
8
Present Value of Money

• Shows what a promise of future money is worth
  now.
• Typically money in hand is worth more now
• Fear of inflation
• 2. Risk the investment may not be paid back
• 3. Loss of opportunity to use the money elsewhere

9
Examples of How Firms Use This
Capital Budgeting Bond Valuation Stock
Valuation (looking at dividends)
10
Financing
Debt Financing Borrowing Money from Lending
Institutions Issuing Bonds Equity
Financing Selling Stock Retained
Earnings Venture Capital
Is using debt to finance operations a bad thing?