CHAPTER 1 Finance the art and science of wealth art meaning the decisions are made by a person and wealth meaning more than just money Making decisions regarding what assets to buy sell and when to buy sell these assets Investment Decisions Decision to invest in real assets tangible or intangible assets Involves hurdle rate and rate of return Expenditure on research and development Decision about which asset to buy EXAMPLE Expanding products into another country Should we stock up with inventory ahead of the holiday season Should we develop a new software package to manage our inventory With a new automated inventory management system it may be possible to sell off our Birdlip warehouse Financing Decisions Decision on the sources and amounts of finance How to raise the money Capital structure of the firm EXAMPLE Do we need a bank loan to help buy the inventory With the savings we make from our new inventory system it may be possible to increase our dividend Alternatively we can use the savings to repay some of our long term debt If you don t make an investment what do you do with your money Pay out shareholders give to them Payout Decisions EXAMPLE Sole Proprietorship Partnership Personal Tax on profits Unlimited Liability Owners are managers get the profit Does not pay income tax Corporation Limited Liability Corporate tax on profits plus personal tax on dividends double taxation Millions of small owners own a tiny portion of the company so you do not manage it OWNERS VS MANAGERS Financial Managers CEO CFO Treasurer Activities that create preserve economic value of assets in charge of everything leads the overall operation of the company Not classically a financial manager The financial manager oversees all financial staff Responsible for financial policy and corporate planning Maintains banking relationships Responsible for cash management and raising of capital Obtains and manages capital Responsible for investing the firms spare cash Responsible for arranging any issue of common stock Controller Manages accounting and tax operations Responsible for preparation of financial statement Ensures money is used efficiently Goals for financial managers MAXIMIZE the value of the business buy maximizing the stock price Opportunity Cost Capital minimum acceptable rate of return on capital investment Keep stockholders happy Stakeholder someone that has a financial interest in that company EXAMPLE suppliers employees retired are stakeholders Shareholders the one that matters in the corporation an owner of shares in a company EXAMPLE any person company or institution that owns shares in a company s stock BASICS OF A COMPANY STRUCTURE hierarchy and pros cons of different structures Agency Issue Principal Problem Managers are agents for stockholders and are tempted to act in interest rather than maximizing value RECOGNIZE AGENCY RELATIONSIPS CHAPTER 2 Financial Markets forums in which financial securities tradable assets are issues and traded Type of asset traded equity fixed income Maturity of financial asset money vs capital Owner of financial asset primary vs secondary Nature of the transaction OTC vs auction Financial Intermediaries raise money from investors and provide financing for individuals companies and other organizations Mutual Fund pooled collection of assets that invests in stocks bonds and other securities Hedge fund like a mutual fund but with no restrictions can do what ever they want sketchy Pension Fund no ownership pays out contributions teacher Financial Institutions are indeed intermediaries but traditionally do more than simply pool invest savings Commercial Banks Investment Banks Insurance Companies Understand how each player above interacts between investor and corporation Top two ownership groups in both US debt and equity markets CHAPTER 3 Balance Sheet Financial Statement that shows the value of the firms assets and liabilities at a particular time What does a balance Sheet contain Assets listed on left liabilities listed on right Balance sheet accounts 5 Current Assets Fixed Assets Total Assets Current Liabilities Stockholders Equity CARNIDAL RULE OF BALANCE SHEET Income Statement Financial statement that shows the revenues expenses and net income of a firm over a period What does an Income Statement contain Revenues Expenses and Net Income EBIT total revenues costs depreciation NET INCOME Statement of Cash Flows Financial Statement that shows the firms cash receipts and cash payments over a period of time WHATS THE DIFFERENCE BETWEEN CASH FLOW AND EARNINGS CASH FLOW FROM OPERATIONS Free Cash Flow Cash available for distribution to investor after firm pays for new investment or additions to working capita Free Cash Flow Formula interest payments to debt investors shareholders operating cash flow capital expenditures CHAPTER 4 Financial ratio analysis Financial ratios how to interpret them Shareholder value Leverage Investment Efficiency Liquidity Du Pont analysis both ROA and ROE ROA after tax operating income sales x sales total assets at start of year after tax operating income total assets at start of year Asset turnover Operating profit margin ROE after tax operating income sales x sales assets x assets equity x net income after tax operating income net income equity Operating profit margin Asset turnover Leverage ratio Debt burden ROA CHAPTER 5 Why does money have time value Inflation depreciating real assets investment opportunity What is it s relation to consumer theory Future value and compounding understand formula be able to work problems Present value and discounting understand formula be able to work problems Finding waiting time n and the interest rate Only TVM problems involving lump sum cash flows