FUNDAMENTALS

OF
FINANCIAL MANAGEMENT

Lecturer: Tien C. Nguyen, MBA

Spring 2011

1
 Course Content
y 1 Introduction to Finance
Topic 1. Finance. Overview of
Сorporate Financing Decisions. Capital Markets and
Financial Instruments.
y 2 Discounted Cash Flow and Present Value
Topic 2.
Concept.
y Topic 3. Valuing Debt and Equity Securities: Bond vs.
Stock
y Topic 4. Investment Evaluation. Capital Budgeting
Decisions.
y Topic 5. Risk and Return. Introduction to Portfolio
Theory.
y 6 Long-term
Topic 6. Long term Financial Decisions: Capital
Structure and Cost of Capital.
2
 Course Assessment

Element Weight
g
1. In-class tests (2) 30%
2 Mid-term
2. Mid E
Exam 30%
3. Final Exam 40%
TOTAL 100%

3
 Resource

y Required Textbook:
Brealey, Myer & Allen, Fundamentals of
C
Corporate
t Fi
Finance, 6-th
6 th ed.
d MMcGraw
G Hill,
Hill 2008
y Selected web sites:
◦ TheStreet.com at www.thestreet.com
◦ The CNN at www.money.cnn.com
◦ Yahoo finance at www.finance.yahoo.com

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 Lecture 1:

F d
Fundamentals
t l off Finance
Fi

Resource: Chapter 1 & 2,Corporate Finance, Brealey, Myers and Allen

5
 Forms of Business Organization

Proprietorship
/ Sole S
Proprietor Partnership Corporation Corporation
Who own the
business? manager partners shareholders shareholders
Are owners &
managers
separate? no no yes sometimes
What is limited &
owners' unlimited unlimited unlimited limited
yes -
Are owners & corporate
business taxed no - individual no - individual income tax & no - individua
separately? income tax income tax individual tax income tax

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Possible Goals of Corporation
y Maximize the earnings and earning
growth
y Maximize the market share
y Maximize EPS
y Maximize the shareholders’
shareholders wealth

Maximizing stock prices???

7
 Wh t is
What i Sh
Shareholders’
h ld ’ W Wealth?
lth?
Managerial
g actions,, the economic
environment, and the political climate

“True” “true” “Perceived” “Perceived” risk

investor risk investor returns
returns

Stock’s intrinsic
Stock’s market price
value

Market equilibrium:
Intrinsic value = stock price 8
 Which Determines Shareholders’
Stock price
e W lth?
Wealth?

Stock
overvalued
Intrinsic value
S

Market price
p
Stock
undervalued

Time
9
9
 Possible Goal of Corporation (cont.)

y Primary goal is to maximize their stock

stock’s
s
intrinsic value
y Value – based management:
◦ All management decision can be analyzed in terms
of their effect on shareholder wealth
◦ Valued-based management involves choosing the
alternative that has the greatest positive effect on
shareholder wealth

10
 Agency Problem at Corporation

y Agency problem between:

◦ Managers vs. shareholders
◦ Creditors
C dit vs. shareholders
h h ld

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Financial Decisions at Corporation

y Capital Budgeting / Investment decision

◦ How to employ funds (which assets should firm
i
invest)
)

y Financing decision
◦ How to acquire funds (form and amount of
financing the investment)

y Dividend decision
◦ How to distribute profit (how much to return to
shareholders)
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 Link between Investment, Financing
andd Di
Dividend
id d DDecisions
i i

Uses of Cash = Sources of Cash

Increase in Cash from Increase Proceed of
+ Dividends = + +
Investments operations In Debt Equity Issue

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 Role of Financial Manager
2 Investments
2.Investments 1a. Raising
funds

Financial 1b. Obligations

g Financial
Operations Manager (stocks, debt
securities) Markets
(plant,
3.Cash from (investors)
equipment, operational
ti l
projects) activities
4.Reinvesting 5.Dividends or
i t
interest
t
payments

Finance function – managing the cash flow

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 Wh is
Who i Fi
Financial
i lMManager
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)

President and Chief

Operating Officer (COO)

Vi President
Vice P id t and d
Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager Credit Manager Tax Manager Cost Accounting

Capital Expenditures Financial Planning Financial Accounting Data Processing

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 Understanding Financial Terms

y Accounting concepts
◦ Assets = Liabilities + Equity
x Real
R l assetst
x Financial assets
◦ Depreciation

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Understanding Financial Terms

y Financial markets
◦ Primary vs. secondary market
◦ M
Money vs. capital
it l market
k t
◦ Organized vs. OTC
◦ Financial instruments
x Stock
x Bond
B d/D Debenture
b t
x Promissory note/bank bill
◦ Cost of capital/opportunity cost
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Primary vs
vs. Secondary Markets
y Primary market – primary issues of securities
are sold, allows governments, banks,
corporations to raise money by directly selling
financial instruments to the public.

y Secondary market – allows investors to trade

financial instruments between themselves.
Secondary transactions take place.

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 Money vs
vs. Capital Market
Money markets – short
short-term
term assets (maturity
less than 1 year) are traded:
Certificates of deposits (CDs)
Commercial papers (CPs)
Treasury bills

Capital markets – long-term assets (maturity

longer than 1 year) are traded:
Stocks
Corporate bonds
Long term government bonds
Long-term
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Organized Exchange vs.
vs OTC
y Organized exchange – most of stocks,
stocks bonds
and derivatives are traded.
◦ Has trading
g floor: traders execute transactions in the
secondary market for their clients.

y Stocks
St k nott listed
li t d on the
th organized
i d exchanges
h
are traded in the over-the-counter (OTC)
market.
◦ facilitates secondary market transactions.
◦ no have a trading floor: buy/sell orders are
completed via telecommunications network

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 Financial Instruments
y By type of issuers:
◦ Government
◦ State
◦ Corporation
◦ Financial institution
y By maturity: short-term vs. long-term
y By type of yield:
◦ Dividend bearing: stock
◦ Discount debt: treasury bill
◦ Interest bearing: bond
y By level of risk
◦ Risk-free: T-bill
◦ Low risk: treasury note/bond
note/bond, blue chip stock
◦ High risk: junk bond, derivatives
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 Ratings
Moody’s S&P Meaning Expected return
Investment grade
Aaa AAA Best quality Lowest
Aa AA High quality Lower
A A Favorable Middle
Baa BBB Medium-grad Middle/Upper
Speculative grade
Ba BB Speculative element High
B B Small assurance of Higher
payments
Speculative grade
Caa CCC Poor standing, Default or Very high
danger of default
Ca CC Highly speculative
standing
C C Very speculative:
V l ti poor
prospects of attaining
investment standing
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D In default
 Tutorial

y Chapter 1:
◦ Self-test: 1.1, 1.2, 1.3
◦ Quiz:
Q i 1 1, 2
2, 3,
3 4
◦ Problems: 16, 18, 20

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