1 introduction to financial mgt
-
Upload
shahid-afzalsyed -
Category
Economy & Finance
-
view
360 -
download
4
Transcript of 1 introduction to financial mgt
By Dr. B. Krishna ReddyProfessor and Head_SKIM
1.1. Introduction1.2. Defining finance1.3. The Firm: a sistemic approach1.4. Corporate Finance: the financial
function1.5. The financial objective: value
creation1.6. Financial main principles1.7. Finance: historic evolution1.8. Main programmes in Finance
I am saving for retirement. Should I use a pension fund, mutual fund, direct stock market investment ? I want that new car. Should I use my cash saving, lease, borrow?Which is the best way to pay for my holidays, for my house? I’m thinking about starting a new business. Will it reward me adequately?Marocco has asked for major project financing.
Should my organization provide the funds?
Why study finance?
To manage your personal resources
To deal with the world of business
To pursue interesting and rewarding career opportunities
To make informed public choices as a citizen
For the intellectual challenge
Household Business Firms Government Foreign Sector
SURPLUS SPENDING UNITS
DEFICIT SPENDING UNITS
Has more cash income flow than expenditure on consumption and real investments in a period of time. The surplus is then allocated to the financial sector.
Other terms for surplus unit are saver, lender, buyer of financial assets, financial investor, supplier of loanable funds, buyer of securities.
The surplus unit may buy financial assets, hold more money, or pay off financial liabilities issued earlier when in a deficit situation
The household and foreign sectors are usually a surplus sector
Has more expenditures on consumption and real goods (investment) in the real sector than income during a period of time
The deficit unit must participate (borrow) in the financial sector to balance cash inflows with outflows
Other terms for deficit expending unit are borrower, demander of loanable funds, and seller of securities.
The deficit spending unit may issue financial liabilities, reduce money balances, and sell financial assets acquired previously when in a surplus situation
Contracts related to the transfer of funds from surplus to deficit budget units
Financial claims are also called financial assets and liabilities, securities, loans, and financial investments.
For every financial asset, there is an offsetting financial liability.
Total receivable equal total payable in the financial system
Loans outstanding match borrowers’ liabilities
Financial markets offer opportunity for:
› Financing for DSUs (primary)› Financial investing for SSUs (primary and
secondary)› Providing liquidity via trading financial
claims in secondary markets
THE FLOW OF FUNDS DIAGRAM
Deficit SpendingUnit (DSU)
Surplus Spending Unit (SSU)
FundsFunds
Financial Assets = Financial Claims
THE FLOW OF FUNDS DIAGRAM
Deficit SpendingUnit (DSU)
Surplus Spending Unit (SSU)
FundsFunds
Financial Assets = Financial Claims
Borrower demander of loanable funds
seller of securities
Saver, lender buyer of financial assets
financial investorsupplier of loanable funds
buyer of securities.
Assets: any possession that has value in an exchange
› tangible: value depends on particular physical properties (reproducible and non-reproducible)
› intangible: legal claims to some future benefit. Financial assets
Main properties of financial assets
› 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 in a costly and time-consuming search (J.Tobin)
THE FLOW OF FUNDS DIAGRAM
DIRECT FINANCING (Markets)
Deficit SpendingUnit (DSU)
Surplus Spending Unit (SSU)
INDIRECT FINANCIAL INVESTMENT
OR INTERMEDIATION FINANCING
BrokersDealers
Intermediaries
FundsFunds
Funds Funds
THE FLOW OF FUNDS DIAGRAM
DIRECT
Deficit SpendingUnit (DSU)
Surplus Spending Unit (SSU)
INDIRECT
BrokersDealers
Intermediaries
FundsFunds
Funds Funds
Direct Financial Assets Purchase
Indirect Financial Assets Purchase
Direct Financial Assets Issue
Direct Financial Assets Issue
What is Finance? Types of Finance definitions
› Lack of any specific definition› Raising and spending funds› Economic decisions with a time
component› Micro/Macro: need for integration
Finance is analytical. Finance is based on economic
principles. Finance uses accounting information
as an input for decision-making. Finance is international in perspective. Finance is constantly changing. Finance is the study of how to invest
and raise money productivelyhttp://garnet.acns.fsu.edu/~ppeters/fin3403/
Finance is the study of how people allocate scarce 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 evaluate these uncertain cash flows
Bodie and Merton
When implementing decisions, people make use of the Financial System which can be defined as the set of markets and other institutions used for financial contracting and exchange of assets and risks
Bodie and Merton
Financial theory consists of:› the set of concepts that help to organize
one’s thinking about how to allocate resources over time
› the set of quantitative models used to help evaluate alternatives, make decisions, and implement them These concepts and models apply at all
levels and scales of decision making
Bodie and Merton
A basic tenet of finance is that the existence of economic organizations (e.g. firms and governments) facilitate the satisfaction of people’s consumption preferences
Bodie and Merton
Finance Theory is the study of the behaviour of individuals in the intertemporal allocation (over time) of their resources in an uncertain environment, and the study of the function of economic institutions and markets in making these allocations possible.
Economía FinancieraMarín, José M. / Rubio, GonzaloAntoni Bosch, Editor, Barcelona, 2001
The practice of “finance” exists for the creation of value
Financial contracting brings about the substitution of real
wealth (i.e. real business assets) for financial wealth (i.e. securities) Investing in financial securities has better attributes that in real assets. Value is created in tthe real assets held by businesses, and then transmitted into the value of financial
wealth issued by businesses and held by investors.
Norton y Scott, “A new Paradigm: the value creation
function of finance”, january 2001
Finance is the process of transforming existing assets into new, contractual forms, as well as the analytical techniques needed to support this process, for the purpose of wealth creation in modern, capitalistic economies.
Norton y Scott, “A new Paradigm: the value creation
function of finance”, january 2001
Financial management (Corporate finance) deals with 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 in stocks and bonds.
Financial Markets and Institutions includes the study of the banking system and markets.
Peterson and Fabozzi
1.1. Introduction1.2. Defining finance1.3. The Firm: a sistemic approach1.4. Corporate Finance: the financial
function1.5. The financial objective: value
creation1.6. Financial main principles1.7. Finance: historic evolution1.8. Main programmes in Finance
Subsistema de
recursos humanos
Subsistema de
dirección y gestión
Subsistema de
dirección y gestión
Subsistema
comercial
Subsistema de
operaciones
Din
ero
Din
ero
Person
al
Perso
nal
Bienes y servicios
Personal
Personal
Goods and
Services
Resourses Expenses Sales
Incomes
Subsistema de
recursos humanos
Human Resources
Subsystem
Subsistema de
dirección y gestión
Management
Subsystem
Subsistema de
dirección y gestión
Finance Subsystem
Commercial
Subsystem
Operations
Subsystem
Fun
ds
Fun
ds
Human re
source
s
Human
reso
urce
s
Goods and Services
Personnel
Human Resources
Resourses
FINANCIAL SUBSYTEM
Planificación FinancieraPlanificación Financiera
FINANCIACIÓN
Financiación Externa
Autofinanciación
Beneficio
INVERSIÓN
Financiación en activo fijo
Inversión en activo circulante
Costes
Subsistema de recursos
humanos
Subsistema de
operaciones
Subsistema comercial
Subsistema de dirección
y gestión
Demanda de créditos
Valores
Mercados Financieros
Dividendos
Impuestos
ENTORNO
Dinero
Recurso
s
Expenses
Resources
AmortizaciónReservas
Planificación FinancieraPlanificación Financiera
FINANCIACIÓN
Financiación Externa
Autofinanciación
Beneficio
INVERSIÓN
Financiación en activo fijo
Inversión en activo circulante
Costes
Subsistema de recursos
humanos
Subsistema de
operaciones
Subsistema comercial
Subsistema de dirección
y gestión
Demanda de créditos
Valores
Mercados Financieros
Dividendos
Impuestos
ENTORNO
Dinero
Recurso
s
In
AmortizaciónReservas
Planificación FinancieraFinancial Planning
FINANCIACIÓN
Financiación Externa
Autofinanciación
FINANCING
External Financing
Retained earnings
BeneficioBenefit
INVERSIÓN
Financiación en activo fijo
Inversión en activo circulante
Costes
INVERSIÓN
Financiación en activo fijo
Inversión en activo circulante
INVESTMENT
Fixed Asset
Current Assets
Costs
Subsistema de recursos
humanos
Human Recourses
Subsystem
Subsistema de
operaciones
Operations
Subsystem
Subsistema comercial
Commercial Subsystem
Subsistema de dirección
y gestión
Management Subsytem
Demanda de créditos
Valores
Mercados Financieros
Dividendos
Impuestos
ENTORNO
Debt
Securities
Financial Market
Dividends
Taxes
ENV IRONMENT
Funds
Resource
s
Income
Empoloyees
DepreciationReserves
• 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)
FINANCIALMANAGEMENT(CORPORATE
FINANCE)
r ( r > k ) k
FINANCIAL SYSTEMREAL SYSTEM
INVESTMENT FINANCING
INVESTMENT / FINANCIAL SUBSYTEM
RETURNREPAYMENT AND RETURN
FINANCIAL MARKETS
FIRM OPERATIONS
(Real goods & services
• Goal of management: maximize the economic well-being, or wealth, of the owners (current shareholders)
=> maximize the price of the stock
• Share price today = Present value of all future expected dividends at required return
1 1
.max.Pr..i
i
i
k
diceShareMax
• Financial managers must create or generate value for their shareholders.
• Economic Value Added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis).
• The formula for calculating EVA is as follows:
EVA = Net Operating Profit After Taxes - (Capital * Cost of Capital)
• Rational Financial behavior • Risk aversion• Budgetary diversification • Existence of two parts in all financial transaction• Measurement by cash flows • Signaling and informative asymmetry • Efficiency of financial markets • Direct relation of risk and return • Existence of valuable ideas • Financial conduct initiative • The Time Value of the money and value additivity.
Principles of century XX: Beginning of the research in finance
EVENTS
Finance at the present
- Expansion of the Years 20 - The 29 Crises - Economy military of the 40 - Expansion of the 50- Crises of the petroleum of the 73
Modern
Approach
1900-
1950-
1970-
1980-
1990-
Classical Approach
APT Model(Ross, 1970)
Options Valuation Models (Black y Scholes, 1973)
Portfolio selection Theory (Markowitz, 1952,1959)
CAPM (widening and reformulation)
Dividends Policy (Modigliani, Miller, 1963)
Capital Assets Pricing Model (CAPM) (Sharpe, 1963-4, Lintner, 1965)
Efficient Market Theory
(Fama, 1970)
Financial Structure (Modigliani, Miller, 1958)
Agency Theory
Information
Theory
Financial Innovation
Methods based on Fuzzy Sets Theory
(Kaufmann y Gil, 1986-87)
Chaos Theory,Non Linear Dynamics
Markets Efficiency
Para
dig
m y
ears
70
Behavioral finance
2000-
Lecture 1: What is finance? (II)1.10. Finance: historic evolution
• Managements of Investments- Capital Budgeting.• Capital Structure and Dividend Policy.• Market Efficiency.• The Capital Asset Pricing Model.• Options Theory• Agency Theory• Financial Planning• Small Firms
Kidwell, Peterson, Blackwell, Whidbee: Financial Institutions, 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