Business Finance Intro FIL 240 Prepared by Keldon Bauer Syllabus Assumed foundation Economics micro and macro Accounting Understand how financial statements are generated Statistics Required Materials Textbook Then read it Calculator I will use an overhead version of the TI BA II Access to the Wall Street Journal Clicker Objectives of the Course Familiarize students with financial economics from a managers perspective Two components Theoretical Computational Put them together with essay Grading Based on Exams Homework and Quizzes Exams will be given in class as scheduled You will need to bring the following to exams Calculator 2 pencil The Website The class website can be found at http lilt ilstu edu kjbaue2 Homework will be posted at this website General Note KEEP UP Read the chapter Do the homework This is not an easy subject Don t whine What is Business Finance The simple answer How businesses and their assets are financed Financial Manager Actively manages the right side of a balance sheet Interacts with debt and equity investors and maintains a good relationship with the market for sources of investment funds How Does Finance Work Securities Securities Financial Institutions Funds Funds Funds Suppliers of Funds Demanders of Funds Securities Funds Securities Funds Securities Financial Markets Funds Securities Areas of Finance Four Main Fields in Finance 1 Financial Markets Institutions Economics of money credit as well as the business institutions that make them function 2 Investments Economics of debt and equity markets 3 Managerial Finance Financial tools and techniques to optimally mange financial resources 4 International Finance Any of the above in a global setting Financial Markets Institutions Companies that specialize in financial matters Banks commercial and investment credit unions savings and loans Insurance companies Mutual funds Pension funds Job opportunities Investments Work with financial assets such as stocks and bonds Determining the value of financial assets risk versus return and asset allocation Job opportunities Stockbroker or financial advisor Portfolio manager Security analyst Managerial or Corporate Finance Using financial tools and techniques to optimally manage a firm s financial resources Job opportunities Corporate treasurer CFO International Finance This is an area of specialization among all of the areas discussed so far It may allow you to work in other countries or at least travel on a regular basis Need to be familiar with exchange rates and political risk Need to understand the customs of other countries and speaking a foreign language fluently is also helpful Why Study Finance Marketing Budgets marketing research marketing financial products Accounting Dual accounting and finance function preparation of financial statements Management Strategic thinking job performance and profitability Personal finance Budgeting retirement planning college planning day to day cash flow issues Business Finance Some important questions that are answered using finance What long term investments should the firm take on Where will we get the long term financing to pay for the investment How will we manage the everyday financial activities of the firm Financial Manager Financial managers try to answer some or all of these questions The top financial manager within a firm is usually the Chief Financial Officer CFO Treasurer oversees cash management credit management capital expenditures and financial planning Controller oversees taxes cost accounting financial accounting and data processing Capital Management Decisions Capital budgeting What long term investments or projects should the business take on Capital structure How should we pay for our assets Should we use debt or equity Working capital management How do we manage the day to day finances of the firm Goal of Financial Management What should be the goal of a corporation Maximize profit Minimize costs Maximize market share Maximize the current value of the company s stock Does this mean we should do anything and everything to maximize owner wealth The Agency Problem Agency relationship Principal hires an agent to represent their interest Stockholders principals hire managers agents to run the company Agency problem Conflict of interest between principal and agent Aligning Interests Carrot Incentive Plans Stock Options Performance plans Performance shares Cash bonuses But this may lead to cheating Lying on financial statements Backdating options grants Aligning Interests Stick Punitive Repercussions Regulations SEC Sarbanes Oxley Act 2002 Lawsuits Class action lawsuits against the corporation and management Takeovers Sarbanes Oxley Act 2002 An act aimed at eliminating corporate disclosure and conflict of interest problems Contains provisions about corporate financial disclosures and relationships among corporations analysts auditors attorneys directors officers and shareholders Other Stakeholders Groups that are impacted by the workings of the firm Employees customers suppliers creditors owners etc Only the owners known as the residual claimants are the focus of our discussion thus far