1. Financial Economics, FUIEMS, 2009 Engineering Economics Financial Economics, Accounting & Corporate Finance

2. Financial Economics, FUIEMS, 2009 Financial economics Branch of economics studying the interrelation of financial variables, such as shares, bonds and securities, and economics such as price, interest, inflation, tax. Financial economics concentrates on influences of real economic variables on financial ones.economics variablesreal It includes –Valuation –Financial markets –Financial institutions and regulations Finance is the science of funds management funds

3. Financial Economics, FUIEMS, 2009 Accounting Accounting is the art of communicating financial information about a business entity to users. The communication is generally in the form of financial statements that show the economic resources under the control of management.Accounting is the art of communicating financial information about a business entity to users. The communication is generally in the form of financial statements that show the economic resources under the control of management.business entity communicationfinancial statementseconomic resourcesbusiness entity communicationfinancial statementseconomic resources Accounting is thousands of years old. The earliest accounting records were found in the Middle East which date back more than 7,000 yearsMiddle East

4. Financial Economics, FUIEMS, 2009 Accounting Accounting is a set of concepts and techniques that are used to measure and report financial information about an economic unit.Accounting is a set of concepts and techniques that are used to measure and report financial information about an economic unit. The information is potentially reported to a variety of different types of interested parties. These include business managers, owners, creditors, governmental units, financial analysts, and even employees.The information is potentially reported to a variety of different types of interested parties. These include business managers, owners, creditors, governmental units, financial analysts, and even employees.

5. Financial Economics, FUIEMS, 2009 Users of Accounting Information OwnersOwners LendersLenders Labor OrganizationsLabor Organizations CustomersCustomers Society groupsSociety groups Government Regulatory AgenciesGovernment Regulatory Agencies

6. Financial Economics, FUIEMS, 2009 Types of Accounting Financial accounting is concerned with reporting of information to parties outside the firm. In contrast, managerial accounting is primarily concerned with providing information for internal management.Financial accounting is concerned with reporting of information to parties outside the firm. In contrast, managerial accounting is primarily concerned with providing information for internal management. Both financial accounting and managerial accounting depend upon a strong information system to reliably capture and summarize economic data.Both financial accounting and managerial accounting depend upon a strong information system to reliably capture and summarize economic data. Information technology has solved this problem during the past 50 years.Information technology has solved this problem during the past 50 years. Now, accounting is more of a dynamic, decision-making discipline, rather than a bookkeeping task.Now, accounting is more of a dynamic, decision-making discipline, rather than a bookkeeping task.

7. Financial Economics, FUIEMS, 2009 Accounting - Limitations Accounting data is not absolute or concrete.Accounting data is not absolute or concrete. Considerable amounts of judgment and estimation are necessary to develop the specific accounting measurements that are reported during a particular month, quarter, or year.Considerable amounts of judgment and estimation are necessary to develop the specific accounting measurements that are reported during a particular month, quarter, or year. Accounting has not yet advanced to value a business (or a business's assets).Accounting has not yet advanced to value a business (or a business's assets). The "reliability" of reported data, can pose a limitation on its "relevance."The "reliability" of reported data, can pose a limitation on its "relevance."

8. Financial Economics, FUIEMS, 2009 Terminologies Assets are the economic resources, and include such items as cash, accounts receivable, inventories, land, buildings, equipment. Liabilities are expenditures such as loans, and other obligations arising in the course of business Owners' equity is the owner's "interest or profit " in the business. It is equivalent to assets minus liabilities for a particular business. Fundamental Accounting Equation Assets = Liabilities + Owners' Equity Balance Sheet is the key financial statement (sometimes called the statement of financial position).

9. Financial Economics, FUIEMS, 2009

10. Financial Economics, FUIEMS, 2009 Major Financial Statements Financial accounting information is conveyed through a standardized set of reports.Financial accounting information is conveyed through a standardized set of reports. BALANCE SHEETBALANCE SHEET INCOME STATEMENT: It provides information about revenues generated and expenses incurred.INCOME STATEMENT: It provides information about revenues generated and expenses incurred. THE STATEMENT OF RETAINED EARNINGS: It shows how retained earnings increased and decreased in response to events that impacted income. Retained earnings is reduced by dividends paid to shareholders.THE STATEMENT OF RETAINED EARNINGS: It shows how retained earnings increased and decreased in response to events that impacted income. Retained earnings is reduced by dividends paid to shareholders. STATEMENT OF CASH FLOWS: The statement of enterprise's cash flow. This statement reveals how cash is generated and expended during a specific period of time.STATEMENT OF CASH FLOWS: The statement of enterprise's cash flow. This statement reveals how cash is generated and expended during a specific period of time.

11. Financial Economics, FUIEMS, 2009

12. Corporate Finance Corporate finance is an area of finance dealing with financial decisions made by business enterprises and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks.financebusiness enterprisesmaximizecorporate valuerisks Finance is the science of funds managementfunds

13. Financial Economics, FUIEMS, 2009 What is Corporate Finance? Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision. Defined broadly, everything that a business does fits under the corporate finance. Regardless of your job, understanding and being able to analyze corporate decisions is important

14. Financial Economics, FUIEMS, 2009 Corporate Finance Corporate Finance addresses the following three questions: 1.What long-term investments should the firm engage in? 2.How can the firm raise money for the required investments? 3.How much short-term cash flow does a company need to pay its bills?

15. Financial Economics, FUIEMS, 2009 Three major decision in corporate finance The investment decision –What makes for a good investment? The financing decision –Where do firms raise/acquire the funds for value- creating investments? –What mix of owner’s money (equity) or borrowed money (debt) should the firm use? The dividend decision –How much of a firm’s funds should be reinvested in the business and how much should be returned to the owners?

16. Financial Economics, FUIEMS, 2009 First Principle of Corporate Finance Invest in projects that yield a return greater than the minimum acceptable rate If there are not enough investments that earn the MARR, return the cash to stockholders. These decision criteria will be consistent with the objective of the firm: Maximize the Value of the Firm

17. Financial Economics, FUIEMS, 2009 Corporate Governance and Managerial Decisions Managers making decisions that are consistent with the firm objective of firm value maximization is predicated on the assumption that managers will act in the best interest of shareholders Corporate governance addresses the relationships between the various stakeholders in the firm

18. Financial Economics, FUIEMS, 2009 Finance is not a science… Often times, decision inputs are subjective Experience allows us to become more confident about our inputs

19. Financial Economics, FUIEMS, 2009 Corporate finance - Key functions Planning for future funding Manage bank relationships Ensure corporate profit Proportion the liabilities Risk and valuation analysis Commercial input to negotiations with partners Rating agency liaison

20. Financial Economics, FUIEMS, 2009 Investment Environment

21. Financial Economics, FUIEMS, 2009 Valuation Determination of the fair value of an asset –How risky is the asset? (identification of the asset- appropriate discount rate) –What cash flows will it produce? (discounting of relevant cash flows)cash flows –How does the market price compare to similar assets? (relative valuation) –Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)