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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