Finance Concepts & Current Topics
Course Detail Basic financial language Conceptual skills Emphasis is on applying concepts to current financial topics Reading & team intensive Complete readings before class
Resources FFM – Fundamentals of financial management FMR – Fundamentals of finance reader CFE – Course of financial English Handouts/Website postings for current topics
Course overview by week 1 Introduction 2 Fundamental concepts 3 Financial assets 4 Capital budgeting 5 Capital structure 6 Working capital 7 Midterm exam 8 Derivatives 9 multinationals 10 hybrids 11 central banks The Fed & PBOC World Bank & IMF Exchange rates 2008 financial crisis Final exam
Assessments Team presentations Debates (maximum 10 bonus points) Case presentations Team formation due January 17 Quizzes (2) Examinations (midterm & final) Open book & notes
Contact Information Office: 20/F Building B, S&T Plaza, TUSP, No. 1 Telephone: Website:
An Overview of Financial Management Chapter 1
Financial management areas Money & capital markets Investments Financial management
Money & capital markets Money A commodity or asset, such as gold, an officially issued currency, coin or paper note, that can be legally exchanged for something equivalent, such as goods or services. Capital Financial assets or the financial value of assets, such as cash, available for use Capital markets Financial markets that facilitate the flow of long- term funds
Current trends in finance Globalization Is McDonald’s an American company? Over 60% of its net income is generated outside the U.S. Information technology Space Time Information access Electronic commerce
Forms of business organization Sole proprietorships Partnerships Corporations
Sole proprietorship Unincorporated business owned by an individual Advantages Easy and inexpensive to start Few government regulations Avoids corporate income taxes Disadvantages Difficult to obtain capital Unlimited liability Legal debts or obligations that arise during the course of business operations. Life of the business limited to the life of the owner
Partnership An unincorporated business owned by 2 or more persons Advantages are similar to sole proprietorships, plus: Specialized expertise Synergy among partners (1+1=3?) Disadvantages Unlimited liability Limited life of the organization Difficulty in transferring ownership Mutual obligations Difficulty to raise large amount of capital
Corporation A legal entity (person) separate from its owners and managers Advantages Unlimited life Easy transferability of ownership Limited liability Can raise large amount of capital (stocks & bonds) Disadvantages Setting up a corporation Double taxation (corporate and earnings paid out as dividends) Subject to take-over
Staff and management goals Financial staff responsibility: obtain and use funds to maximize the value of the firm Management responsibility: Maximize stockholder’s wealth = maximize stock value Other responsibilities? Ben & Jerry’s? Business ethics—company’s attitude and conduct toward its employees, customers, suppliers, community, employees, stockholders
Agency relationships Principals hire agents to perform services (delegation) Financial management’s agency relationships: Stockholders and managers Managers and debt holders (creditors) Agency problem A potential conflict of interests between the agent and stockholders or creditors
Agency relationships Motivating managers to act in the stockholders best interests Performance shares Executive stock options Direct intervention by stockholders (institutional investors) Threat of firing Threat of hostile take-over
Managerial actions to maximize shareholder wealth What determines the price of a company’s stock? Factors include: A financial asset is related to its ability to generate cash flows Timing of cash flows—sooner is better Investors are risk averse—they’ll pay more for stock that generates consistent cash flows Investment decisions How to finance the firm Debt & equity mix Dividend policy decision—what to give out, what to retain