fina 2303 chapter 1

Page 1

why study finance?

in business occasion, we face problems like

- how to raise money for firm?

- should the firm produce or outsource production?

- issue new stock or borrow money?

value creation: how different business related disciplines benefit from finance?

- marketing: marketing financial products

- accounting: dual accounting and finance function

- management: strategic thinking, profitability

- personal finance: budgeting, planning, cash flow issues

Page 2

the financial manager

=> make financial decision for stakeholders

three main tasks:

- make investment decisions (capital budgeting)

weigh costs and benefits each investment

decide which of them qualify as good use of stockholders' money

if it adds value to owners

- make financing decisions (capital structure)

decide if raise money from selling more shares of stocks (equity) or borrowing money (debt)

- manage cash flow from operating activities (working capital management)

must ensure theres enough cash on hand to meet its obligations

goals of financial managers:

- maximize wealth of the owners and shareholders

- increase value of shares

Page 3

financial manager's place in corporation

corporate management team:

- broad of directors (group of ppl elected by shareholders who have decision making authority)

- CEO (instituting rules and policies set by broad of the directors)

ethics and incentives in corporations:

- agency problems (when managers put self-interest before of those shareholders

Page 4

stock market

- private corporation has a limited number of owners, no organized market for shares

- public corporation has unlimited number of owners, share trade on an organized market (stock market)

physical stock markets:

- auction market (NYSE)

- market makers (specialists)

- bid ask spread (bid price, ask price, transaction cost)

over the counter stock markets:

- dealer markets

NASDAQ (electronic)

bonds

fx

- listing standards (requirements a company must meet to be eligible in trading on stock market (NYSE's listing standards are stringent than those of NASDAQ)

other stock market:

- bond market

- foreign exchange market

- commodities market

- derivative securities

Page 5

financial institutions

- entities provide financial services (taking deposits, managing investment, brokering financial transactions, making loans)

- roles of FI

transfer funds from savers to borrowers

move funds through time

spread out risk bearing

- financial cycle

savers and investors invest and save their money

through loans and stocks money flows to FI

FI launch projects and new ideas

wages, profits and interests have money flows back to savers and investors