Introduction to Financial Management

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Nov 9, 2013 (3 years and 9 months ago)

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Introduction to

Financial Management

Bill Klinger

Introduction to Financial Management


Introductions


Me


You


Syllabus


Class procedures


Class expectations


A recent study showed that 83% of people who lost
their job, lost it because of attendance or attitude.


Daily


Listen to 1130 AM


Watch CNBC


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?

Five Principles of Finance

1.
Cash flow is what matters


Difference between profits and cash flow


Care about incremental cash flow

2.
Money has a time value


Dollar today is worth more than a dollar tomorrow. Why?


Opportunity cost

3.
Risk requires reward


Return for delaying consumption


Return for taking risk


investors & business people hate risk


Risk requires
expected

return

Exp return

Risk

Five Principles of Finance


4.
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

5.
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

o
E.g. managers may try to keep jobs rather than max firm wealth

o
E.g. managers may work to get a bonus


Should be monitored by Board of Directors


Recent Lessons


Cash flow is what matters


Dot com bubble


Money has time value


Short
-
term profit incentives


Risk requires reward


Financial crisis and over
-
leveraging


Long
-
Term Capital Management


Market prices are generally right


Many hedge funds bet against the market… and lost


Conflicts of interest cause agency problems


Runaway executive compensation

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

Corporate Forms


Sole proprietorships


Partnerships


General


Limited


Corporations


Legal entity separate and apart from its owners


Limited Liability Companies, LLCs

Financial Markets


Capital markets


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

Financial 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


Have a physical presence


E.g. NYSE, AMEX, …


Over
-
the
-
counter markets


Informal network of broker/dealers


NASDAQ

Investment Banking


Investment banker


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