Presentation on theme: "1 Finance School of Management FINANCE Zvi Bodie Robert C. Merton."— Presentation transcript:
1 Finance School of Management FINANCE Zvi Bodie Robert C. Merton
2 Finance School of Management About the instructors About the TA About the course About the requirements –20% assignment & class performance –15% mid-term test –65% final test About the book and authors
UESTC 四川省精品课程 金融学基础 5 教材与作者 Zvi Bodie Robert C. Merton
6 Finance School of Management Chapter 1: What is Finance? Objective To Define Finance The Value of Finance Introduction to the Players
7 Finance School of Management Chapter 1 Contents Defining Finance Why Study Finance Household Finance Financial Decisions-Firms Forms of Business Organization Separation of Ownership and Management The Goal of management Market Discipline- Takeovers Role of the Financial Specialists in a Corporation
8 Finance School of Management Defining Finance What do you know about ‘Finance’? ?
9 Finance School of Management Finance, as a scientific discipline, is the study of how to allocate scarce resources over time un der conditions of uncertainty. Present Future Defining Finance
10 Finance School of Management Analytical “Pillars” to Finance Optimization over time Asset valuation Risk management
11 Finance School of Management Finance Theory consists of –a set of concepts that help to organize one’s thinking about how to allocate resources over time, –a set of quantitative models to help one evaluate alternatives, make decisions, and implement them.
12 Finance School of Management Financial System The financial system is defined as the set of markets and other institutions used for financial contracting and the exchange of assets and risks. The ultimate function of the system is to satisfy people’s consumption preferences.
13 Finance School of Management Why Study Finance?
14 Finance School of Management Why Study Finance?
15 Finance School of Management Why Study Finance?
16 Finance School of Management Why Study Finance? To manage your personal resources To deal with the world of business To pursue interesting and rewarding career opportunities To make informed public choices as a citizen To expand your mind
17 Finance School of Management Harry M. Markowitz (1927~) Awarded to the 1990 Nobel Prize Main Contribution: –The father of modern portfolio theory
18 Finance School of Management William F. Sharpe (1934~) Awarded to the 1990 Nobel Prize Main Contribution: –Developing the Capital Asset Pricing Model (CAPM) theory
19 Finance School of Management Merton H. Miller (1923~2000) Awarded to the 1990 Nobel Prize Main Contribution: –The M&M (Modigliani-Miller) Theorem
20 Finance School of Management Robert C. Merton (1944~) Awarded to the 1997 Nobel Prize Main Contribution: –The pricing of options and other derivatives
21 Finance School of Management Myron S. Scholes (1941~) Awarded to the 1997 Nobel Prize Main Contribution: –The pricing of options and other derivatives
22 Finance School of Management Financial Decisions of Households Consumption and saving decisions Investment decisions Financing decisions Risk-management decisions
23 Finance School of Management Assets Personal investing & Asset allocation Liability, Debt Net Worth = Assets – Liabilities Consumption preferences, exogenous and endogenous elements Important Terms
24 Finance School of Management Financial Decisions of Firms Strategic planning & Capital budget decisions –What businesses to be in –Identifying ideas for new investment projects –Evaluating the projects, and deciding which ones to undertake –Implementing them, a plan for acquiring assets and for training the personnel
25 Finance School of Management Financial Decisions of Firms Financing (Capital structure) decision –A feasible financing plan –The decisions about how much debt and equity to have –Wide range of financial instruments and claims –A corporation’s capital structure determines who gets what shares of its cash flows, and partially determines who gets to control the company. Working capital management decision –The day-to-day prosaic financial affairs of the business.
26 Finance School of Management Dividend decision –How much cash to distribute to shareholders Risk-management Decision –How and on what terms should the firm seek to reduce the financial uncertainties it faces? Financial Decisions of Firms
27 Finance School of Management Forms of Business Organization （个体业主制） A sole proprietorship （个体业主制） –unlimited liability （合伙制） A partnership （合伙制） –unlimited liability –general partner & limited partner （现代公司制） A corporation （现代公司制） –a legal entity distinct from its owners –ownership, board of directors and limited liability –public corporations & private corporations
28 Finance School of Management Quick Check Is a corporation owned by a single person a sole proprietorship? Why? In a corporation the liability of the single shareholder would be limited to the assets of the corporation.
29 Finance School of Management Separation of Ownership and Management The owners of a firm delegate the responsibility of running the business to professional managers who may not own any shares. Why? What? How?
30 Finance School of Management Reasons for Separation of Ownership and Management The owner need not have both the talents of a manager and the financial resources. The need to pool resources to achieve an efficient scale of production. The need of owners to diversify their risk in an uncertain economic environment. Allowing for savings in the costs of information gathering. The “learning curve” or “going concern” effect favors the separated structure.
31 Finance School of Management Separation of Ownership and Management The corporate form is especially well suited to the separation of owners and managers because it allows relatively frequent changes in owners by share transfer without affecting the operations of the firm.
32 Finance School of Management Conflicts of Interest The separated structure creates the potential for a conflict of interest between the owners and the managers. An agency problem exists where the principal has to entrust their interests to an agent who acts on their behalf. Contractual arrangements, incentive schemes, and monitoring are used to control principal ‒ agency conflicts. The social cost for resolving the conflict.
33 Finance School of Management The Goal of Management The difficulties of the goal of corporate management to serve the best interests of the shareholders. To be feasible and effective, the right rule for the goal of management should be independent of who the owners are.
34 Finance School of Management Shareholder-Wealth-Maximization Rule An illustration: the decision between a risky investment and a safe one The role of well-functioning capital markets The rule depends only upon –the firm’s production technology –market interest rates –market risk premiums –security prices The rule does not depend upon the risk aversion or wealth of the owners.
35 Finance School of Management Ambiguities of Profit-Maximization Rule Multi-periodic profits Uncertain future revenues or expenses An illustration –Each of project A, B, and C require an initial outlay of $1 million. –Project A will return $1.05 million one year from now and then over. –Project B will last for two years, return nothing in the first year, and then $1.1 million two years from now. –Project C will either pay $1.2 million or $0.9 million one year from now and then over.
36 Finance School of Management A Well-Functioning Stock Market Implementation of the management goal and market-price information The existence of an efficient stock market allows the manager to substitute one set of external information which is relatively easy to obtain ‒ namely stock prices ‒ for another set which is virtually impossible to obtain ‒ information about the shareholders’ wealth, preferences, and other investment opportunities.
37 Finance School of Management Market Discipline: Takeovers The value of voting rights as a means of enforcement The mechanism of takeover （接管） for aligning the incentives of managers with those of shareholders –The threat of a takeover and the subsequent replacement of management provides a strong incentive for current managers (acting in their self-interest) to act in the interests of the firm’s current shareholders by maximizing market value.
38 Finance School of Management The Roles of Corporate Financial Specialists Financial executive ‒ a person with authority in the following functions: VP Operations TreasurerVP Financial PlanningController Chief Financial OfficerVP Marketing Chief Executive Officer Board of Directors
39 Finance School of Management Role of the Financial Manager Financial manager Firm's operations Financial markets (1) Cash raised from investors (1)
40 Finance School of Management Financial manager Firm's operations Financial markets (1) Cash raised from investors (2) Cash invested in firm (1)(2) Role of the Financial Manager
41 Finance School of Management Financial manager Firm's operations Financial markets (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (1)(2) (3) Role of the Financial Manager
42 Finance School of Management Financial manager Firm's operations Financial markets (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (1)(2) (3) (4a) Role of the Financial Manager
43 Finance School of Management Financial manager Firm's operations Financial markets (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested(4b) Cash returned to investors (1)(2) (3) (4a) (4b) Tax paid to Government (5) (5) Tax leakage Role of the Financial Manager
44 Finance School of Management Financial Functions in a Corporation Planning Provision of Capital Administration of Funds Accounting and Control Protection of Assets Tax Administration Investor Relations Evaluation and Consulting Management Information Systems
45 Finance School of Management Assignments 1, 3, 4, 6, 7 Team Work: 8