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					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.

				
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posted:1/31/2011
language:English
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