Business Finance - Intro

1. Business Finance - Intro FIL 240 Prepared by Keldon Bauer

2. Syllabus • Assumed foundation • Economics (micro and macro) • Accounting (Understand how financial statements are generated) • Statistics

3. Required Materials • Textbook – Then read it! • Calculator (I will use an overhead version of the TI BA II) • Access to the Wall Street Journal • Clicker

4. Objectives of the Course • Familiarize students with financial economics from a managers perspective. • Two components • Theoretical • Computational • Put them together with “essay”

5. Grading • Based on Exams, Homework and Quizzes • Exams will be given in class as scheduled. • You will need to bring the following to exams: • Calculator • #2 pencil

6. The Website • The class website can be found at: • http://lilt.ilstu.edu/kjbaue2/ • Homework will be posted at this website.

7. General Note • KEEP UP • Read the chapter • Do the homework • This is not an easy subject! • Don’t whine

8. What is Business Finance?? • The simple answer: How businesses and their assets are financed. • Financial Manager: • Actively manages the right side of a balance sheet • Interacts with debt and equity investors and maintains a good relationship with the market for sources of investment funds.

9. Securities Securities Financial Institutions Financial Markets Funds Funds Funds Demanders of Funds Suppliers of Funds Securities Funds Securities Funds Funds Securities Securities How Does Finance Work?

10. Areas of Finance • Four Main Fields in Finance • Financial Markets & Institutions • Economics of money & credit, as well as the business institutions that make them function • Investments • Economics of debt and equity markets • Managerial Finance • Financial tools and techniques to optimally mange financial resources • International Finance • Any of the above in a global setting

11. Financial Markets & Institutions • Companies that specialize in financial matters • Banks – commercial and investment, credit unions, savings and loans • Insurance companies • Mutual funds • Pension funds • Job opportunities

12. Investments • Work with financial assets such as stocks and bonds • Determining the value of financial assets, risk versus return and asset allocation • Job opportunities • Stockbroker or financial advisor • Portfolio manager • Security analyst

13. Managerial or Corporate Finance • Using financial tools and techniques to optimally manage a firm’s financial resources. • Job opportunities • Corporate treasurer • CFO

14. International Finance • This is an area of specialization among all of the areas discussed so far • It may allow you to work in other countries or at least travel on a regular basis • Need to be familiar with exchange rates and political risk • Need to understand the customs of other countries and speaking a foreign language fluently is also helpful

15. Why Study Finance? • Marketing • Budgets, marketing research, marketing financial products • Accounting • Dual accounting and finance function, preparation of financial statements • Management • Strategic thinking, job performance and profitability • Personal finance • Budgeting, retirement planning, college planning, day-to-day cash flow issues

16. Business Finance • Some important questions that are answered using finance • What long-term investments should the firm take on? • Where will we get the long-term financing to pay for the investment? • How will we manage the everyday financial activities of the firm?

17. Financial Manager • Financial managers try to answer some or all of these questions • The top financial manager within a firm is usually the Chief Financial Officer (CFO) • Treasurer – oversees cash management, credit management, capital expenditures and financial planning • Controller – oversees taxes, cost accounting, financial accounting and data processing

18. Capital Management Decisions • Capital budgeting • What long-term investments or projects should the business take on? • Capital structure • How should we pay for our assets? • Should we use debt or equity? • Working capital management • How do we manage the day-to-day finances of the firm?

19. Goal of Financial Management • What should be the goal of a corporation? • Maximize profit? • Minimize costs? • Maximize market share? • Maximize the current value of the company’s stock? • Does this mean we should do anything and everything to maximize owner wealth?

20. The Agency Problem • Agency relationship • Principal hires an agent to represent their interest • Stockholders (principals) hire managers (agents) to run the company • Agency problem • Conflict of interest between principal and agent

21. Aligning Interests • Carrot (Incentive Plans): • Stock Options • Performance plans • Performance shares • Cash bonuses • But this may lead to cheating • Lying on financial statements • Backdating options grants

22. Aligning Interests • Stick (Punitive Repercussions): • Regulations • SEC • Sarbanes Oxley Act (2002) • Lawsuits • Class action lawsuits against the corporation and management • Takeovers

23. Sarbanes-Oxley Act (2002) • An act aimed at eliminating corporate disclosure and conflict of interest problems. • Contains provisions about corporate financial disclosures and relationships among corporations, analysts, auditors, attorneys, directors, officers, and shareholders.

24. Other Stakeholders • Groups that are impacted by the workings of the firm. • Employees, customers, suppliers, creditors, owners, etc. • Only the owners (known as the residual claimants) are the focus of our discussion thus far.