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Overview of Financial Management

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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Overview of Financial Management

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  1. Overview of Financial Management

  2. 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

  3. Economics & Finance • The free enterprise system is a brutal beast that takes no prisoners

  4. 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

  5. Economics & Finance • Categories of scarce economic resources • Natural • Human • Labor • Entrepreneurial • Capital • Scarce financial resources

  6. Economics & Finance • Opportunity costs • Entrepreneurial resources • You can substitute someone else’s entrepreneurial skills for your own, at a cost

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. You don’t want this to be your business, do you? Economics & Finance

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