1. Principles of Finance
Bill Klinger

2. Principles of Finance Introductions Me You Syllabus Class procedures
Class expectations
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3. 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?

4. 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

5. 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”

6. 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

7. 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

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

9. 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

10. 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

11. 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

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

13. 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