FINANCE

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FINANCE

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What is Finance?

• Financial Management is concerned with creation
  and maintenance of wealth (economic value).

We need to learn financial decision making
techniques to maximize wealth.
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Financial Knowledge is needed to Decide

• When to issue stocks and bonds (Stock and Bond
  valuation)
• When to barrow from the bank (debt policy)
• When to invest in a new asset (NPV-new project)
• When to replace an existing asset
  (NPV-replacement)
• When to extend credit to a customer (Credit
  policy)
• How much cash to maintain (Cash Policy)

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Importance of Financial Knowledge

• The importance of your financial decision making
  knowledge (as a financial manager) could be seen
  in the comparison of Merck and General Motors

So, depending on your decision you can lose or
gain wealth in terms of billions of dollars
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Financial Management Principles

• 1) The measurement unite in Finance is RETURN
• 2) Financial decisions are primarily based on
  Return comparisons
• 3) Return has 3 dimensions (amount time risk)
• 4) Money has a Time Value
• 5) Time is measured by periods
• 6) There is a trade-off between risk and return,
  however only Higher non-diversifiable Risk will
  bring in Higher Return
• 7) Taxes affect business decisions
• 8) Cash Flows (not on profits) are important
  however only Incremental After Tax Cash Flows
  count
• 9) Good ideas or inventions will generate high
  Cash Flows, however in competitive markets they
  wont last forever
• 10) Capital Markets are Efficient
• 11) There is an Informational Gap between
  managers and public
• 12) The Agency Cost is a reality of Financial life

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Goal of the Firm

• Maximization of the shareholders wealth
• this is the same as
• a) Maximizing Firm Value
• b) Maximizing Stock Price

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Goal of the Firm

• Is not Profit Maximization

• Because
• It is vague in terms of time frame (for the
  short run elimination of RD)
• It does not consider risk.
• It does not consider cost of resources
  dedicated to the business (cost of capital)

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Legal Forms of Business

• 1) Sole Proprietorship
• A business owned by a single individual.
• Owner maintains title to the firms assets.
• Owner has unlimited liability.
• 2) Partnership
• Similar to a sole proprietorship, except that
  there are two or more owners.

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Legal Forms of Business

• 2a) General Partnership
• All partners have unlimited liability.
• 2b) Limited Partnership
• Consists of one or more general partners, who
  have unlimited liability, and
• One or more limited partners (investors) whose
  liability is limited to the amount of their
  investment in the business.

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Legal Forms of Business

• 3) Corporation
• A business entity that legally functions separate
  and apart from its owners.
• Owners liability is limited to the amount of
  their investment in the firm.
• Owners hold common stock certificates, and
  ownership can be transferred by selling the
  certificates.

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The Corporation and Financial Markets
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The Corporation and Financial Markets
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The Corporation and Financial Markets
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The Corporation and Financial Markets

• Initial Public Offering (IPO)
• The first time the firms stock is sold to the
  general public.
• Seasoned New Issue
• A new stock offering by a firm that already has
  stock that is traded in the secondary market.

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• END

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Developing Higher-Order Thinking
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"... önce kendinize çeki düzen verin. Kendinize
çeki düzen verebilmek için önce düsüncelerinizi
yoluna koyun.Düsüncelerinizi yoluna koyabilmek
içinse, önce bilgi eksikliklerinizi giderirn."

Konfiçyus
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Financial Management Principles

• 1) Risk - return trade-off
• 2) Time value of money
• 3) Cash - not profits - is king
• 4) Incremental cash flows count
• 5) The curse of competitive markets
• 6) Efficient capital markets
• 7) The agency problem
• 8) Taxes bias business decisions
• 9) All risk is not equal
• 10) Ethical dilemmas are everywhere in finance