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

2. What is Finance about?
capital
returns

3. 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

4. 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.

5. 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.

6. Structure of Balance Sheet

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

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

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

10. 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)

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

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

13. 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.

14. The Formula for Future Value

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

16. 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.

17. 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:

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

19. Assignments
Review slides of chapter 1 and 5 from FINC3131.