Introduction to Finance - created from Mind Map

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Finance is the study of acquisition and investment of cash or funds for the purpose of enhancing value and wealth 

Parties in financial environment

1. Financial managers

2. Investors

3. Financial markets

4. Financial institutions 

Firm's objective

TO OBTAIN (Financing) AND ALLOCATE (Investing) FINANCIAL RESOURCES EFFECTIVELY AND EFFICIENTLY in order to achieve the objective of the firm.

relationship between risk and return

Higher risk associated with higher returns and vice versa” 

the higher the risk we are willing to face, the bigger the return we can expect

Financial markets

a place where suppliers and demanders of loan and investments can transact business directly

financial manager

make investment decision to expand business

investors

provide funds to firms

financial institutions

Serves and intermediaries that channel the savings of

individuals, businesses and government into loans or

investments

Money market

▪︎ short term instruments

▪︎ very liquid

▪︎ treasury bills,  banker's acceptance

Capital market

▪︎ long term instruments 

▪︎ less liquid

▪︎ stocks, bonds

short term instruments

very liquid

long term instruments

less liquid

primary market

secondary market

where securities and other

financial assets are resold among investors.

private placement

investor purchase shares directly from issuer.

investment banker

Investment bankers buy securities from issue and reselling them to investors.

financial institutions

Financial intermediaries

responsibilities of financial manager

1. forecasting and planning

2. investment and financing decisions

3. coordination and control

4. dealing with financial markets

Profit maximization

1. The amount of revenue remaining after deducting all costs and expenses

2. short term 

3. emphasizes the amount of profits received and not on when the profits are received

4. ignores risk that comes with the project

5. increase in profit does not mean increase the cash flow

Shareholder's wealth maximization

1. Market value of common stock held in the company

2. has to achieve all the short term targets

3. principle time value of money

4. decision made after consider the risk factor

5. increase the shareholaders' wealth related to the cash flow

Advantages

1. Easy to calculate profit

2. Stress on the efficient use of capital resources

Disadvantages

1. Emphasizes on short run

2. Ignore the risk involved when making financial decisions

3. Ignore timing of returns

4. Concentrate on earning per share, therefore the firm may implement a dividend policy that might never pay dividend

5. Ignores real world complexities when making financial decisions 

Advantages

 1. Emphasizes on long term return 

2. Consider risks when make decisions 

3. Consider timing of returns

4. Consider the economic situations

5. Emphasized of EPS3. Consider timing of returns

Disadvantages

1. Long term process

Return

The outcome or profit from investment over a period of time

Risk

The actual return will be different from the return that is expected

Systematic risk

External environment which finacial managers have no direct control or influence

Unsystematic risk

Variability of returns on stocks that is not the results of general market movements

Inflation or purchasing power risks

The risk of loss of income and principal because of the

decreasing purchasing power of the ringgit.

Interest rate or money-rate risk

Interest rate risk is the chance that changes in interest rate

will adversely affect security value.

Market risk

The loss of capital due to changes in securities price because of changes in investors expectation about prospect of the company

Business risk

The risk that the firm will have general business

problems

Liquidity risk

Risk of not being able to convert the assets into cash 

Default risk

Possibility that the issuing company is unable to make

interest payments or principal repayments on debt

Event risk

Risk that comes from an unexpected event that has a significant and usually immediate effect on the underlying value of an investment