CHAPTER 1 AN INTRODUCTION TO FINANCIAL INSTITUTIONS, INVESTMENTS & MANAGEMENT ELEVENTH EDITION Basic Finance 1

1 Introduction: Why Finance? Finance is the study of money and management.  Could also be viewed as value. Like Economics, Finance explores the allocation of resources over time *  Firm: Inventory, Equipment, Plant  Investor: Portfolio  Bank: Loan Value creation is about two components: Time and Risk/Uncertainty

1 Introduction: Why Finance? It is a way of thinking and a set of tools that reflect this way of thinking  It is a great decision making system

1 The Divisions of the Finance Discipline Financial Institutions Investments Corporate (business) finance

1 The Divisions of the Finance Discipline Financial Institutions  The study of financial institutions is concerned with the institutional aspects of the discipline, which encompass the creation of financial assets, the markets for trading securities (NYSE) and the regulation of financial markets.  Created through:  Investment bankers  Financial Intermediaries (Commercial Banks)  Life Insurance Companies  Transfers the savings of individuals to firms needing funds, this produces financial assets.

1 The Divisions of the Finance Discipline Investments  Primary concerned with the analysis of individual assets and the construction of well Diversified portfolios.  Includes: Financial Planning Financial Goals Diversified Portfolios  Decisions are based on a number of issues  Taxation  Monetary Policy (FED)  Ect

1 The Divisions of the Finance Discipline Corporate (Business) Finance  Emphasizes the role of the Financial Manager  Duties include: Meet obligations Best source of financing Allocation of resources among investment alternatives

1 Key Financial Concepts Sources of Finance Risk and Return Financial Leverage Valuation

1 Key Financial Concepts Balance Sheet  Financial statement that enumerates (as of a point in time) what an economic unit owns and owes and its net worth. Assets  Items or property owned by a firm, household, or government and valued in monetary terms. Liabilities  What an economic unit owes expressed in monetary terms. Equity  Owner's investment in a firm; a firm's Book value or net worth.

1 Key Financial Concepts Sources of finance  Debt  Equity Sources of return  Income  Price appreciation Risk  the uncertainty that the expected return will not be achieved

1 Key Financial Concepts Financial leverage  The use of borrowed funds Valuation  Determination of what an asset is currently worth  Goal of management: maximization of shareholder value

1 Assumptions Analysis is built on assumptions. Text illustrations employ assumptions. Page 7 Results of financial models and applications of financial theory can be only as good as the accuracy of the assumptions used to complete the analysis.

1 Finance and Other Business Disciplines Economic Theory and Accounting Principles Finance studied from  A business perspective  An individual ’ s perspective  Valuation of securities  Portfolio construction Methods learned can be applied to either discipline