Business Finance - IntroSyllabusRequired MaterialsObjectives of the CourseGradingThe WebsiteGeneral NoteWhat is Business Finance??How Does Finance Work?Areas of FinanceFinancial Markets & InstitutionsInvestmentsManagerial or Corporate FinanceInternational FinanceWhy Study Finance?Business FinanceFinancial ManagerCapital Management DecisionsGoal of Financial ManagementThe Agency ProblemAligning InterestsSlide 22Sarbanes-Oxley Act (2002)Other StakeholdersBusiness Finance - IntroFIL 240Prepared by Keldon BauerSyllabus•Assumed foundation–Economics (micro and macro)–Accounting (Understand how financial statements are generated)–StatisticsRequired Materials•Textbook – Then read it!•Calculator (I will use an overhead version of the TI BA II)•Access to the Wall Street Journal•ClickerObjectives 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 pencilThe 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 whineWhat 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?Suppliers of FundsDemanders of FundsFundsSecuritiesFinancial InstitutionsFinancial MarketsFunds FundsSecurities SecuritiesFunds FundsSecurities SecuritiesFundsSecuritiesAreas of Finance•Four Main Fields in Finance1. Financial Markets & Institutions•Economics of money & credit, as well as the business institutions that make them function2. Investments•Economics of debt and equity markets3. Managerial Finance•Financial tools and techniques to optimally mange financial resources4. International Finance•Any of the above in a global settingFinancial Markets & Institutions•Companies that specialize in financial matters–Banks – commercial and investment, credit unions, savings and loans–Insurance companies–Mutual funds–Pension funds•Job opportunitiesInvestments•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 analystManagerial or Corporate Finance•Using financial tools and techniques to optimally manage a firm’s financial resources.•Job opportunities–Corporate treasurer–CFOInternational 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 helpfulWhy 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 issuesBusiness 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 processingCapital 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 agentAligning Interests•Carrot (Incentive Plans):–Stock Options–Performance plans•Performance shares•Cash bonuses•But this may lead to cheating–Lying on financial statements–Backdating options grantsAligning Interests•Stick (Punitive Repercussions):–Regulations•SEC•Sarbanes Oxley Act (2002)–Lawsuits•Class action lawsuits against the corporation and management–TakeoversSarbanes-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