FOUNDATIONS OF FINANCE Ohio University College of Business How do we learn? There are primarily seven ways How do we learn? 1. Discussion 2. Practice doing 3. Reading 4. Lecture 5. Audiovisual 6. Teach others 7. Demonstration What do you think of when someone says “finance”? Why is finance important personally? You can expect to earn approximately $25,000 more per year with a Bachelors Degree than just a high school diploma. Earning a graduate degree will net you another $20,000 per year on average. Students graduate with an average of $23,186 in student loan debt and $4,100 credit card debt. Why is finance important personally? 61% of Americans are living paycheck to paycheck, up from 49% last year and 43% in 2007. More than one in five of those earning $100K or more still live paycheck to paycheck. Why is finance important personally? 56% of people did not know that credit score is the single most important factor when applying for a loan for a house, a car or even a new credit card. People spend 12-18% more when using credit cards than when using cash Average credit card debt per household was $8,329 at the end of 2008. What has happened to personal savings rate over time in U.S.? Personal Savings Rate How is Finance related to other fields? Daniel Pink – Does $ Increase Performance? http://www.youtube.com/watch?v=u6XAPnuFjJc Finance: The Art and Science of Managing Money Finance Utilizes? Economics Accounting Financial analysis is like a… Analyst’s opinion of GM Dec 07 Strong Buy 4 Buy 3 Hold 7 Underperform 3 Sell 1 What do you see? What do you see? What do you see? Count every “F” below? FINISHED FILES ARE THE RE SULT OF YEARS OF SCIENTI FIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS... What number goes in the triangle? Organizations that hire Finance Grads Banks Insurance Companies Any Large Business Investment Bankers Stockbrokers OU COB Grads Salary Averages COB Finance 2008 $43,100 $45,000 2009 $45,000 $47,000 Careers in Finance Commercial Banking Financial Planning Insurance Real Estate Money Management Corporate Finance Resources to further explore finance as a career. www.careers-in-finance.com www.collegegrad.com/careers/ Overview Intro to Finance Accounting Review Financial Statement Analysis Forecasting Time Value of Money Capital Budgeting Stock and Bond Valuation Cost of Capital CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT Forms of Businesses Goals of the Corporation Agency Relationships Ethics in Finance Cash Flows and Financial Decisions of Firms Investors Firm’s Financial Manager -Stockholders Operations -Bondholders -Banks, etc. Cash Flows and Financial Decisions of Firms 2 1 Investors Firm’s Financial Manager 4 -Stockholders Operations -Bondholders -Banks, etc. 3 5 1 – Cash raised by selling financial assets 2 – Cash invested in real assets 3 – Cash generated by operations 4 – Cash reinvested 5 – Cash returned to investors (debt payments, dividends, etc. ) Sole proprietorships & Partnerships Advantages Ease of formation Subject to few regulations No corporate income taxes Disadvantages Difficultto raise capital Unlimited liability Limited life Corporation Advantages Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages Double taxation Cost of set-up and report filing Hybrid Forms Limited Liability Partnerships (LLP) Combineslimited liability of corporation with tax advantage of partnership (no double taxation) Limited Liability Companies (LLC) Financial Goals of the Corporation What should management maximize? Financial Goals of the Corporation The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price. Is stock price maximization good or bad for society? Why not maximize profits? Is stock price maximization the same as profit maximization? No, despite a generally high correlation amongst stock price, EPS, and cash flow. Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa). The goal of the financial manager is to maximize the value of the firm. What determines a firm’s value? A firm’s value is the present value of all future free cash flows. Market Capitalizations Billions AFLAC $ 312 APPLE 222 BEST BUY 204 EXXON MOBIL 188 FORD 37 MICROSOFT 24 STARBUCKS 18 WAL MART 14 Market Capitalizations Billions EXXON MOBIL 312 APPLE 222 MICROSOFT 204 WALMART 188 FORD 37 AFLAC 24 STARBUCKS 18 BEST BUY 14 Factors that affect stock price Factors that affect stock price Size of cash flows to shareholders Timing of the cash flows Riskiness of the cash flows What is Ethical Behavior? Behavior that conforms to accepted professional standards of conduct. Types of Ethical Conflicts Agency Costs Conflicts of Interest Information Asymmetry Agency relationships An agency relationship exists whenever a principal hires an agent to act on their behalf. Agency relationships An agency relationship exists whenever a principal hires an agent to act on their behalf. Within a corporation, agency relationships exist between: Shareholders and managers Shareholders versus Managers Managers are naturally inclined to act in their own best interests. But the following factors affect managerial behavior: Stock option plans The threat of firing (Board of Directors, large stockholder, other managers) The threat of takeover Conflicts of Interest Occur when there is a conflict between a person’s personal or institutional gain and the obligation to serve the interest of another party. Information Asymmetry Occurs when one party in a business transaction has information that is unavailable to the other parties in the transaction. There's No Such Thing As "Business" Ethics : There's Only One Rule for Making Decisions Sarbanes-Oxley Act of 2002 Set up a Board with responsibility for: Auditing standards within companies Controlling the quality of audits Major focus is to make sure that publicly-traded corporations accurately present their financial statements. Longer jail sentences Made CEOs responsible for the fin. stmts. Why is corporate finance important to all managers? Corporate finance provides the skills managers need to: Identifyand select the corporate strategies and individual projects that add value to their firm. Forecastthe funding requirements of their company, and devise strategies for acquiring those funds.