Principles of Finance Bill Klinger

Principles of Finance Introductions Me You Syllabus Class procedures Class expectations A recent study showed that 83% of people who lost their job, lost it because of attendance or attitude. Daily Listen to 1130 AM Watch CNBC

Goal of the Firm Goal of the firm – “Maximize shareholder wealth” Why not maximize profits? Why not maximize sales? Market share? How will we measure this? Stock price What influences this measure? Profits Future expectations of performance How does this goal benefit society?

Five Principles of Finance Cash flow is what matters Difference between profits and cash flow Care about incremental cash flow (marginal) Money has a time value Dollar today is worth more than a dollar tomorrow. Why? Opportunity cost Risk requires reward Return for delaying consumption Return for taking risk – investors & business people hate risk Risk requires expected return Exp return Risk

Five Principles of Finance Market prices are generally right Markets fully reflect all available information at any instant in time Efficient market hypothesis Stock prices can be used to measure the value of a firm Conflicts of interest cause agency problems “Agents” are managers who act on behalf of the owners Problem due to separation of ownership and management May result in conflicts of interest E.g. managers may try to keep jobs rather than max firm wealth E.g. managers may work to get a bonus “Not my money”

Recent Lessons Cash flow is what matters Money has time value Dot com bubble Money has time value Daily purchase decisions Risk requires reward Financial crisis and over-leveraging Long-Term Capital Management, Lehman Brothers Market prices are generally right Many hedge funds bet against the market… and lost Conflicts of interest cause agency problems Runaway executive compensation Enron

Finance Primarily about managing money Also about management and interpretation of data Chief Financial Officer, CFO Controller Accounting Data processing Treasurer Cash management Financial planning

Corporate Forms Sole proprietorships Partnerships Corporations General Limited Corporations Legal entity separate and apart from its owners Limited Liability Companies, LLCs

Financial Markets Capital markets Ways to transfer capital Financial institutions that help raise long-term capital Long-term means longer than one year Ways to transfer capital Direct transfer Angle investors, Venture Capitalists Indirect transfer using investment banker Syndicates will buy entire issue of securities and re-sell them Indirect transfer using financial intermediary Intermediaries hold investments for individuals E.g. insurance companies, mutual funds, pension funds

Financial Markets Over-the-counter markets Regulated by the Securities and Exchange Commission (SEC) Public vs. private placement Primary vs. secondary markets Money markets T-bills, CDs, commercial paper Mature in less than one year Spot vs. futures markets Organized security exchanges E.g. NYSE Over-the-counter markets Informal network of broker/dealers NASDAQ

Investment Banking Investment banker Underwriting Spread Specialist who underwrites new securities Consultant on new offerings Underwriting Purchase and resale of new security issues Risk of resale at a profit assumed by investment banker Syndicate – group of underwriters Spread Difference between price paid to company and price sold at

Spreadsheet Basics Basics You should know: Arithmetic Cell references Color You should know: Simple formulas Naming cells

Intro to Excel Practical usage Exercises One period with interest rate Multiple periods with interest rate Multiple periods with interest rate and constant additions Name cells Income statement Multiple period income statements with growth rates Exercises Inventory spreadsheet Investment spreadsheet