Introduction to Financial Management

1. Introduction to Financial Management Bill Klinger

2. Introduction to Financial Management • Introductions • Me • You • Syllabus • Class procedures • Class expectations • A recent study showed that 83% of people who lost their job, lost it because of attendance or attitude. • Daily • Listen to 1130 AM • Watch CNBC

3. Goal of the Firm • Goal of the firm – “Maximize shareholder wealth” • Why not maximize profits? • Why not maximize sales? Market share? • How will we measure this? • Stock price • What influences this measure? • Profits • Future expectations of performance • How does this goal benefit society?

4. Five Principles of Finance Exp return • Cash flow is what matters • Difference between profits and cash flow • Care about incremental cash flow • Money has a time value • Dollar today is worth more than a dollar tomorrow. Why? • Opportunity cost • Risk requires reward • Return for delaying consumption • Return for taking risk – investors & business people hate risk • Risk requires expected return Risk

5. Five Principles of Finance • Market prices are generally right • Markets fully reflect all available information at any instant in time • Efficient market hypothesis • Stock prices can be used to measure the value of a firm • Conflicts of interest cause agency problems • “Agents” are managers who act on behalf of the owners • Problem due to separation of ownership and management • May result in conflicts of interest • E.g. managers may try to keep jobs rather than max firm wealth • E.g. managers may work to get a bonus • Should be monitored by Board of Directors

6. Recent Lessons • Cash flow is what matters • Dot com bubble • Money has time value • Daily purchase decisions • Risk requires reward • Financial crisis and over-leveraging • Long-Term Capital Management, Lehman Brothers • Market prices are generally right • Many hedge funds bet against the market… and lost • Conflicts of interest cause agency problems • Runaway executive compensation • Enron

7. Finance • Primarily about managing money • Also about management and interpretation of data • Chief Financial Officer, CFO • Controller • Accounting • Data processing • Treasurer • Cash management • Financial planning

8. Corporate Forms • Sole proprietorships • Partnerships • General • Limited • Corporations • Legal entity separate and apart from its owners • Limited Liability Companies, LLCs

9. Financial Markets • Capital markets • Financial institutions that help raise long-term capital • Long-term means longer than one year • Ways to transfer capital • Direct transfer • Angle investors, Venture Capitalists • Indirect transfer using investment banker • Syndicates will buy entire issue of securities and re-sell them • Indirect transfer using financial intermediary • Intermediaries hold investments for individuals • E.g. insurance companies, mutual funds, pension funds

10. Financial Markets • Regulated by the Securities and Exchange Commission (SEC) • Public vs. private placement • Primary vs. secondary markets • Money markets • T-bills, CDs, commercial paper • Mature in less than one year • Spot vs. futures markets • Organized security exchanges • Have a physical presence • E.g. NYSE, AMEX, … • Over-the-counter markets • Informal network of broker/dealers • NASDAQ

11. Investment Banking • Investment banker • Specialist who underwrites new securities • Consultant on new offerings • Underwriting • Purchase and resale of new security issues • Risk of resale at a profit assumed by investment banker • Syndicate – group of underwriters • Spread • Difference between price paid to company and price sold at

12. Intro to Excel • Basics • Arithmetic • Cell references • Color • Practical usage • One period with interest rate • Multiple periods with interest rate • Multiple periods with interest rate and constant additions • Name cells • Income statement • Multiple period income statements with growth rates