Basic Areas of Finance:
1. Corporate Finance = Business Finance
a. Work with financial assets such as stocks and bonds.
b. Value of financial assets, risk verses return and asset allocation. c. Job opportunities.
3. Financial Institutions
a. Companies that specialize in financial matters.
i. Banks – Credit unions, savings, and loans.
ii. Insurance Companies
iii. Brokerage Firms
b. Job Opportunities.
4. International Finance
a. An area of specialization within each of the areas discussed so far. b. May allow you to work in other countries or at least travel on a regular basis. c. Need to be familiar with exchange rates and political risk. d. Beneficial to understand the customs of other countries; speaking a foreign language. Business Finance: (Corporate Finance)
Some important questions that are answered using finance:
What long-term investments should be taken on by the firm?
Where will we (the firm) get the long-term financing to pay for the investments? How will we manage the everyday financial activities of the firm? Financial Manager:
They try to answer some or all of the business finance questions. The top financial manager within a firm is usually the Chief Financial Officer (CFO) Treasurer – oversees cash management, credit management, etc. Controller – oversees taxes, cost accounting, etc.
** Corporate Organization Chart, Figure 1.1**
Goals of Financial Management:
What should the goal of a corporation be?
Getting money back to shareholders, investors, etc. Making a profit is important. Minimize costs.
Maximize market share
Maximize the current value per share of the company’s existing stock. Maximize the market value of the existing owners’ equity.
Does this mean we should do anything and everything to maximize owner wealth? Outsourcing? Off-shoring? Corporate support of charities? Enron?
Chapter Two – Accounting Review
The Two Financial Statements:
Balance Sheet (“as of”)
Income Statement (“for”)
Assets = Liabilities + Equity
Current Assets (CA)
Current Liabilities (CL)
Fixed Assets (FA)
Long-Term Debt (LTD)
Total Liabilities + Equity
Net Working Capital: (NWC) = Current Assets – Current Liabilities Liquidity: Speed and ease of turning assets into cash.
1. Cash (Most Liquid)
2. Marketable Security
4. Accounts Receivable (Less Liquid)
Leverage: Debt ÷ Asset
Book Value vs. Market Value:
Balance Sheet Record
Actual value in current market
Growth potential from the company
Cost of Goods Sold
Earnings Before Interest & Tax
Cash Flow from Assets: (CFFA) = Operating Cash Flow – CAPEX – Change in Net Working Capital. Operating Cash Flow (OFC) = Earnings Before Interest & Tax + Depreciation – Taxes CAPEX = Ending Fixed Assets – Beginning Fixed Assets + Depreciation Change in Net Working Capital =
- Current Liabilities
∆NWC = (Interest – New Borrowing) + (Dividends – New Equity)
Chapter Three – Time Value of Money
r → Discount Rate
t → Time in years
n → Number of compounding periods in a year
→ The periodic rate
→ Total periods
FV = PV(1+r)t
FV = PV(1+)nt
Example: Would you give me $1,000 today if I gave you $10,000 on 2/2/2040? (r = 4.5%) In this example we are solving for the future value of $1,000. FV = PV(1+r)t FV = 1,000(1.045)25 = $3,005.43
t = 25 = 2040 – 2015
You would want to give me $1,000 today because in 2040 it is only worth $3,005.43; you want $10,000 over $3,005.43 in 25 years. Example: What is the future value (annual, semi-annual, monthly, & daily)? If the present value is 1,000, t=4, r=6%. Annual Future Value:
FV = 1,000(1+1*4 =...
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