Overview of Financial Management and the Financial Environment CHAPTER 1 Overview of Financial Management and the Financial Environment

What is Finance about? capital returns

Two Main Activities in Finance Raising capital (financing) venture capital equity ( private equity, IPO, seasoned equity offering) debt (commercial loan, bonds, etc.) Investing financial assets (stocks, bonds, mutual funds, hedge funds, derivatives, currencies, etc.) firms, enterprises commodities (gold, metals, etc.) real estates

Three Areas Taught in Universities Corporate finance (financial management) decisions relating to how much and what types of assets to acquire, how to raise capital Financial Investments decisions concerning stocks, bonds and other financial securities (securities analysis; portfolio theory; market analysis) Financial markets The determination of interest rates, exchange rates, and financial securities prices, financial institutions, Federal Reserve system, SEC.

What does a corporate finance manager do? Identify and select the corporate strategies and individual projects that add value to the firm. Forecast the funding requirements and devise strategies for acquiring those funds.

Structure of Balance Sheet

Funding in Corporate Finance Equity common stock preferred stock retained earnings Liability account payable accruals commercial loan bonds

Investing in Corporate Finance Asset management cash, inventory, account receivable, fixed asset Capital budgeting Merger and Acquisition (M&A)

What should be management’s primary objective? The primary objective should be shareholder wealth maximization, which translates to maximizing the fundamental stock price.

What three aspects of cash flows affect an investment’s value? Amount of expected cash flows (bigger is better) Timing of the cash flow stream (sooner is better) Risk of the cash flows (less risk is better)

Free Cash Flows (FCF) Free cash flows are the cash flows that are available (or free) for distribution to all investors (stockholders and creditors).

A firm’s fundamental or intrinsic value FCF1 FCF2 FCF∞ (1 + WACC)1 (1 + WACC)∞ (1 + WACC)2

TI BAII Plus finance calculator Press ‘2nd’ and [Format]. The screen will display the number of decimal places that the calculator will display. If it is not eight, press ‘8’ and then press ‘Enter’. Press ‘2nd’ and then press [P/Y]. If the display does not show one, press ‘1’ and then ‘Enter’. Press ‘2nd’ and [BGN]. If the display is not END, that is, if it says BGN, press ‘2nd’ and then [SET], the display will read END.

The Formula for Future Value

When frequency of compounding is more than once a year n = number of years m = frequency of compounding per year

Examples If you deposit $100 today for 3 years. The stated annual interest rate is 12% a year. How much can you withdraw after 3 years? What is the effective rate? * The answer depends on how often the interest is compounded or paid. There are 4 possible answers.

Possible answers 1. The interest is paid once 1 year: 2. The interest is paid every 6 months: 3. The interest is paid every 3 months: 4. The interest is paid every month:

In-class problem solving Find FV Find PV Find r Find n Find PMT

Assignments Review slides of chapter 1 and 5 from FINC3131.