Fm -Gvs-Lecture 1 Complete
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Transcript of Fm -Gvs-Lecture 1 Complete
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FINANCIAL MANAGEMENT
Unit -I
Lecture 1: What is finance?*Dr.G.V.Satya Sekhar,MBA, Ph.D
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Lecture 1: What is finance?
Introduction
Defining finance
Corporate Finance: the financial function
The financial objective: value creation
Financial main principles
Finance: historic evolution
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Why study financial management?
To manage your organizational resources
To make decisions relating to all financialissues in corporate entity
To pursue interesting and rewarding careeropportunities
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Financial claims are also called financial assets and
liabilities, securities, loans, and financialinvestments.
For every financial asset, there is an offsettingfinancial liability.
Total receivable equal total payable in the financial system Loans outstanding match borrowers liabilities
Financial Claims
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Financial markets offer opportunity for:
Financing for corporate entities ( primarymarket)
Financial investing option for business firms(primary and secondary)
Providing liquidity via trading financial claimsin secondary markets
1.1. Introduction:Financial Claims (2)
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THE FLOW OF FUNDS DIAGRAM
Deficit SpendingUnit (DSU)
Surplus SpendingUnit (SSU)
FundsFunds
Financial Assets = Financial Claims
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THE FLOW OF FUNDS DIAGRAM
Deficit SpendingUnit (DSU)
Surplus SpendingUnit (SSU)
FundsFunds
Financial Assets = Financial Claims
Borrowerdemander of loanable fundsseller of securities
Saver, lenderbuyer of financial assets
financial investorsupplier of loanable funds
buyer of securities.
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Assets: any possession that has value in an
exchange
tangible: value depends on particular physicalproperties (reproducible and non-reproducible)
intangible: legal claims to some future benefit.Financial assets
Real & Financial assets
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Rate of return (R): expected return Risk (r): credit risk, market risk
Liquidity (L): how much sellers stand to lose if
they wish to sell immediately against engaging ina costly and time-consuming search (J.Tobin)
Main properties of financial assets
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THE FLOW OF FUNDS DIAGRAM
DIRECT FINANCING (Markets)
Deficit SpendingUnit (DSU)
Surplus SpendingUnit (SSU)
INDIRECTFINANCIAL INVESTMENT
OR INTERMEDIATION FINANCING
BrokersDealers
Intermediaries
FundsFunds
Funds Funds
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THE FLOW OF FUNDS DIAGRAM
DIRECT
Deficit SpendingUnit (DSU)
Surplus SpendingUnit (SSU)
INDIRECT
BrokersDealers
Intermediaries
FundsFunds
Funds Funds
Direct Financial AssetsPurchase
Indirect Financial AssetsPurchase
Direct Financial AssetsIssue
Direct Financial AssetsIssue
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Finance is the study of how organisations
allocate resources over time costs and benefits are distributed over time but the actual timing and size of future cash
flows are often known only probabilistically
Understanding finance helps you evaluatethese uncertain cash flows
Defining Finance
Bodie and Merton
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W
hen implementing decisions, people makeuse of the Financial System which can bedefined as the set of markets and otherinstitutions used for financial contracting and
exchange of assets and risks
Defining Finance
Bodie and Merton
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the set of concepts that help to organize onesthinking about how to allocate resources over
time the set of quantitative models used to help
evaluate alternatives, make decisions, andimplement them
These concepts and models apply at all levels andscales of decision making
Financial theory consists of:
Bodie and Merton
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The practice of finance exists for the creation ofvalue
Financial contracting brings about the substitutionof real wealth (i.e. real business assets) for financialwealth (i.e. securities)
Investing in financial securities has better attributes that in
real assets. Value is created in tthe real assets held bybusinesses, and then transmitted into the value of financialwealth issued by businesses and held by investors.
Defining Finance: a new paradigm. TheValue Creation Function of Finance
Norton y Scott, A new Paradigm: the value creationfunction of finance, january 2001
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Financial management (Corporate finance) dealswith how firms raise and use funds to make short-
term and long-term investments. Investment deals with how the securities markets
work and how to evaluate and manage investments instocks and bonds.
Financial Markets and Institutions includes the studyof the banking system and markets.
The three primary areas of finance
Peterson and Fabozzi
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Corporate Finance: the financial function Corporations face two broad financial questions:
- What investments should the firm make?- How should it pay for those investments?
Financial managers are concerned with :
Investment Decisions (use of funds):
The buying, holding or selling of types of assets
Financing Decisions (acquisitions of funds)
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Corporate Finance: the financial function
FINANCIALMANAGEMENT
(CORPORATE
FINANCE)
r ( r > k ) k
FINANCIAL SYSTEMREAL SYSTEM
INVESTMENT FINANCING
INVESTMENT / FINANCIAL SUBSYTEM
RETURNREPAYMENTAND RETURN
FINANCIAL
MARKETS
FIRM
OPERATIONS
(Real goods & services
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The Financial objective: value creation
Goal of management: maximize the economic well-being, orwealth, of the owners (current shareholders)
=> maximize the price of the stock
Share price today = Present value of all future expecteddividends at required return
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.max.Pr..i
i
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kdiceShareMax
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The Financial objective: value creation
Financial managers must create or generate value for theirshareholders.
Economic Value Added (EVA) is a measure of a company'sfinancial performance based on the residual wealth calculated bydeducting cost of capital from its operating profit (adjusted fortaxes on a cash basis).
The formula for calculating EVA is as follows:
EVA = Net Operating Profit After Taxes - (Capital * Cost ofCapital)
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Financial main principles
Rational Financial behavior Risk aversion Budgetary diversification
Existence of two parts in all financial transaction ( debit andcredit)
Measurement by cash flows Efficiency of financial markets
Direct relation of risk and return Existence of valuable ideas The Time Value of the money
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Main Issues in finance
Financial Planning
Financial Forecasting Capital Structure Cost of Capital Managements of Investments Capital Budgeting. Working capital management Dividend Policy.
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Kidwell, Peterson, Blackwell, Whidbee: FinancialInstitutions, Markets, and Money, Eighth Edition, John
Wiley & Sons, 2003 Fabozzi, Modigliani: Capital Markets. Institutions and
Instruments. Prentice Hall, 2003
Bodie, Zvi and Merton, Robert C.: Finance. Prentice
Hall, 1999 Pamela P. Peterson and Frank Fabozzi: Financial
Management and Analysis, 2nd Edition, John Wiley &Sons, 2003
References: