Overview of financial management
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Overview of Financial Management. Financial activities. Financial transactions are undertaken for the purpose of exchanging a sum of money today for the expectation of obtaining more money in the future FV = PV(1+i) n. Economics & Finance.

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Financial activities
Financial activities

  • Financial transactions are undertaken for the purpose of exchanging a sum of money today for the expectation of obtaining more money in the future

  • FV = PV(1+i)n

Economics finance
Economics & Finance

  • The free enterprise system is a brutal beast that takes no prisoners

Economics finance1
Economics & Finance

  • Primary suppliers (savers) of funds in U.S.

    • Households

  • Primary users of funds

    • Businesses and government

  • Economics is all about scarce resources

    • You have to “outbid” others, including govt., to obtain control of scarce economic resources

    • You have to have financial resources to obtain control of scarce economic resources

Economics finance2
Economics & Finance

  • Categories of scarce economic resources

    • Natural

    • Human

      • Labor

      • Entrepreneurial

    • Capital

  • Scarce financial resources

Economics finance3
Economics & Finance

  • Opportunity costs

    • Entrepreneurial resources

    • You can substitute someone else’s entrepreneurial skills for your own, at a cost

Economics finance4
Economics & Finance

  • Opportunity costs

    • Financial resources

      • If you spend $1 today, you (generally) have given up the opportunity to spend more than $1 one year from now

      • Pub II vs. bank CD?

      • Value of consumption (savings) now vs. consumption (savings) in future

Economics finance5
Economics & Finance

  • Interest rates ration financial resources

    • High interest rates encourage savings (discourage spending) and discourage borrowing (high cost to business)

    • Low interest rates discourages savings (encourage spending) and encourage borrowing (low cost to business)

  • Federal reserve policy influences interest rates and the supply of loanable funds

Economics finance6
Economics & Finance

  • Goals of Fed policy are to 1) promote "maximum" sustainable output and employment and 2) promote "stable" prices

    • Tightening to cool inflation is generally associated with higher real interest rates

    • Loosening to reduce unemployment is generally associated with lower real interest rates

Economics finance7
Economics & Finance

  • Fed policy can influence your profit

    • Demand for your product(s)  revenue

    • Demand for and supply of resources you buy (incl. financial resources)  expenses

Economics finance8
Economics & Finance

  • Risk – the possibility that one or more undesirable events will occur

  • Insurance companies analyze and attempt to quantify the possibilities

  • Jump from an airplane with a parachute

    • risky

  • Jump from an airplane without a parachute

    • stupid

  • Buy $100 worth of stock vs. deposit $100 into a savings account

Economics finance9
Economics & Finance

  • Systematic risk

    • Macro events

    • Economic, political, and social changes… or shocks

    • You can’t control such changes. but you can plan responses to them (what can you do about shocks?)

  • Unsystematic risks

    • Micro events

    • Unique to an individual, firm, or industry

    • More likely to be influenced by management decisions