iu.fm.lecture01

8/7/2019 IU.FM.lecture01

1/23

FUNDAMENTALS

FINANCIAL MANAGEMENT

Lecturer: Tien C. Nguyen, MBASpring 2011

1


2/23

. .

orporate Financing Decisions. Capital Markets andFinancial Instruments.

op c . scoun e as ow an resen a ueConcept.

Topic 3. Valuing Debt and Equity Securities: Bond vs.Stock

Topic 4. Investment Evaluation. Capital BudgetingDecisions.

Topic 5. Risk and Return. Introduction to PortfolioTheory.

2

op c . ong- erm nanc a ec s ons: ap a

Structure and Cost of Capital.


3/23

Element Wei ht

1. In-class tests (2) 30%

. i -term xam

3. Final Exam 40%

TOTAL 100%

3


4/23

Brealey, Myer & Allen, Fundamentals of

orpora e nance, - e . c raw ,

Selected web sites: TheStreet.comat www.thestreet.com

The CNNat www.money.cnn.com

Yahoo financeat www.finance.yahoo.com

4


5/23

1:

un amenta s o nance

5

Resource: Chapter 1 & 2,Corporate Finance, Brealey, Myers and Allen


6/23

Proprietorship

Proprietor Partnership Corporation

Corporation

Who own the

business? manager partners shareholders shareholders

Are owners &

managers

separate? no no yes sometimes

What is limited &

owners' unlimited unlimited unlimited limited

Are owners &

- -

yes -

corporate

-

6

separately?

income tax

income tax

individual tax

income tax


7/23


8/23


9/23

Which Determines Shareholders

ea

Stock

overvaluedtockpric

Market price

Stockundervalued

99

Time


10/23

intrinsic value

All management decision can be analyzed in terms

of their effect on shareholder wealth

Valued-based management involves choosing the

alternative that has the greatest positive effect on

10


11/23

Managers vs. shareholders

re tors vs. s are o ers

11


12/23

Capital Budgeting / Investment decision How to employ funds (which assets should firm

invest)

How to acquire funds (form and amount offinancing the investment)

Dividend decision

12

How to distribute profit (how much to return to

shareholders)


13/23

Link between Investment, Financing

an v en ec s ons

Uses of Cash = Sources of Cash

Increase in

Investments

+ Dividends =Cash from

operations++

Increase

In Debt

Proceed of

Equity Issue

13


14/23

Financial

.

funds.

1b. Obli ations

Operations(plant,

Manager

Markets

(investors)3.Cash from

(stocks, debt

securities)

projects)

opera ona

activities

4.Reinvesting 5.Dividends or

nterestpayments

14Finance function managing the cash flow


15/23

Board of Directors

o s nanc a anager

Chairman of the Board andChief Executive Officer (CEO)

President and ChiefOperating Officer (COO)

ce res en anChief Financial Officer (CFO)

Treasurer Controller

15

Capital Expenditures

Financial Planning

Financial Accounting

Data Processing


16/23

Assets = Liabilities + Equity

ea asse s

Financial assets

16


17/23

Primary vs. secondary market

oney vs. cap ta mar et

Organized vs. OTC Financial instruments

Stock

on e en ure

Promissory note/bank bill

17


18/23

.

are sold, allows governments, banks,

financial instruments to the public.

Secondary market allows investors to tradefinancial instruments between themselves.

Secondary transactions take place.

18


19/23

.

-

less than 1 year) are traded:Certificates of deposits (CDs)Commercial papers (CPs)

Treasury bills

Capital markets long-term assets (maturitylonger than 1 year) are traded:

StocksCorporate bonds

19

-


20/23

.

,

and derivatives are traded. Has trading floor: traders execute transactions in the

secondary market for their clients.

oc s no s e on e organ ze exc angesare traded in the over-the-counter (OTC)market.

facilitates secondary market transactions.

no have a trading floor: buy/sell orders are

20

comp e e v a e ecommun ca ons ne wor


21/23

Government State

Financial institution

By maturity: short-term vs. long-term Dividend bearing: stock

Discount debt: treasury bill

By level of risk Risk-free: T-bill

21

,

High risk: junk bond, derivatives


22/23

RatingsMoodys S&P Meaning Expected return

Investment grade

Aaa AAA Best quality Lowest

Aa AA High quality Lower

A A Favorable Middle

Baa BBB Medium-grad Middle/Upper

Speculative grade

Ba BB Speculative element High

B B Small assurance of Higher

payments

Speculative grade

Caa CCC Poor standing, Default or Very high

danger of defaultCa CC Highly speculative

standing

22

ery specu a ve: poor

prospects of attaining

investment standingD In default


23/23

Self-test: 1.1, 1.2, 1.3

u z: , , ,

Problems: 16, 18, 20

23

iu.fm.lecture01

Documents