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Introduction to Financial Management

Introduction to Financial Management. Administrative Issues and Course Overview. Today’s plan. administrative issues syllabus prerequisite add, drop and withdraw Middle-term and final exams final grade course overview The functions of the financial market The cost of capital.

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Introduction to Financial Management

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  1. Introduction to Financial Management Administrative Issues and Course Overview FIn 351: Lecture 1

  2. Today’s plan • administrative issues • syllabus • prerequisite • add, drop and withdraw • Middle-term and final exams • final grade • course overview • The functions of the financial market • The cost of capital FIn 351: Lecture 1

  3. The instructor • My name is George Li • Call me George, not professor • Office: BUS 315 • Office hours: • 17:15 to 18:15 MW • Website: http://online.sfsu.edu/~li123456 • Research interest: • Corporate finance: real options, technological innovations, and valuations • Asset pricing: information and stock prices FIn 351: Lecture 1

  4. Why do you want to take this course • First, what ‘s your objective or why are you taking Fin 351? • nothing better to do today ? • become a millionaire overnight? • the instructor is a nice guy for a good grade? • get a “stamp of approval” to get a job ? • learn finance for fun ? • simply a required course ? • learn finance to be more successful? FIn 351: Lecture 1

  5. My objectives in this course • My objectives • i want you to understand the concepts / issues better • i want you to feel comfortable talking about finance and answering finance questions. • i want you to gain a set of tools and concepts that will help you look at the world in a slightly different way. • What is standing in the way of those objectives? • Over-confidence • Under-confidence FIn 351: Lecture 1

  6. Two ways of learning • Positive • Can be a fun, since it is an opportunity to improve your future career, open your mind and broaden your vision • Look at each difficulty as an opportunity to learn new things • Good performance • Negative • Can be boring, since it is regarded as a burden, a task • Look at each difficulty as a “torture” or pain • Bad performance FIn 351: Lecture 1

  7. Textbook • fundamentals of corporate finance, by Brealey, Myers and Marcas (6th edition) • sorry about the cost • this is a standard textbook used in many major schools for the first course in corporate finance FIn 351: Lecture 1

  8. Prerequisite • You are required to take Fin 350 with a grade of at least C-. • It is the school’s policy that all the students in this course must satisfy this requirement and there is no exception FIn 351: Lecture 1

  9. Add, drop and withdrawal policy • The business school has the policy for add, drop and withdrawal • Students can withdraw once • Please read the bulletin for detail information about the withdrawal and adding to this course. FIn 351: Lecture 1

  10. Homework and cases • To help you understand the concepts taught in class, and prepare the mid-term and the final exams, there is a homework set assigned for each covered chapter, which is not graded, but its solution will be posted in my website. The best way to learn is to do a lot of problems, think a lot and try to apply what you have learned to real world problems. • In addition, I will discuss two or three cases in lectures to apply the concepts you have learned in this course to solve problems in the real financial world. These cases will also help you to get better prepared for the final. FIn 351: Lecture 1

  11. The mid-term and the final exam • The mid-term and final exams will be in class (closed book), with a form of multiple choice questions. • There are no makeup or in-advance exams. • The final exam is cumulative, based on all the covered materials. FIn 351: Lecture 1

  12. Final grade • Your overall course grade will be based on your performance in the mid-term and the final exams as follows: • Class attendance 5 pts • Mid-term exam: 35 pts • final exam: 60 pts • total 100 pts FIn 351: Lecture 1

  13. Grading policy • Your grades are based on the distribution of the scores of the class. If you are at the top 10% of the class, you will get a grade of at least A-. • The average grade for this class is about B-, which is the average grade for this course in the last two years. FIn 351: Lecture 1

  14. The curve of grades • Ranking (from top to bottom) Grade • 0%-10% A Range ( A, A-) • 10%-50% B Range (B+, B, B-) • 50%-85% C Range (C+, C, C-) • 85% - 95% D Range (D+,D,D-) • 95%-100% F FIn 351: Lecture 1

  15. Corporate finance: what is it? • Corporate Finance • A set of concepts, theories and approaches that help the firm to make financial decisions FIn 351: Lecture 1

  16. Financial decisions • Capital budgeting (use of the capital) • Real investments • Mergers; acquisitions • Financing (capital structure decision) • Equity • Debt FIn 351: Lecture 1

  17. FIN 351: course organization FIN 351 Module 1 Fundamentals of valuation Module 2 Valuing risky investments Risk and return Module 3 Corporate financial decisions Module 4 Market efficiency and options Fundamentals of PV Financial decision Interest rates Portfolio theory Diversification and covariance Types of securities Stocks, bonds and other Weak, semi-strong and strong form efficiency Information and stock prices Perpetuities and annuities calculation Tangency portfolio, CAPM risk and return Modigliani-Miller theorem 1 Pizza size is independent of how sliced Options and Black-Scholes Valuing stocks and bonds NPV and other criteria Effect of leverage WACC and discount rate Modigliani-Miller theorem 2 WACC Binomial model, replication Risk-neutral probabilities FIn 351: Lecture 1

  18. Course organization • This course is broken-down into four modules • Module 1: time value of money • Module 2: risk and return • Module 3: capital structure • Module 4: financial markets FIn 351: Lecture 1

  19. Time value of money • This module is a “skill building” block in this course • We will soon have the necessary skills needed to value stocks and bonds • In this module, we don’t consider risk explicitly: • future cash flows forecasts are given • discount rates are given FIn 351: Lecture 1

  20. Risk and return • This part teaches us about uncertainty • How do we measure risk? • How much is one piece of risky cash flow in the future worth (today)? • They are both: • skill building sections • conceptually more difficult sections FIn 351: Lecture 1

  21. Financing decisions • If you are the CEO of an industrial company • you can make your company more valuable by choosing “better” projects • we want to know if you (and the CFO) can make your company more valuable by changing the mixture of your financing (i.e. the ratio of debt to equity) FIn 351: Lecture 1

  22. The efficiency of financial markets and options • We will look at how information gets into security prices • We will learn three forms market efficiency • We will examine the implication of market efficiency on financing • We don’t have time to examine options FIn 351: Lecture 1

  23. (2) (1) (4a) (4b) (3) (1) Investors buy shares with cash (2)Cash is invested (3) Operations generates cash (4a) Cash reinvested (4b) Cash returned to investors Financial markets and investors Investors Firm's Financial operations Manager (stockholders save and invest in closely held firm.) Real assets (timberland) FIn 351: Lecture 1

  24. Financial markets • A financial market • Securities are issued and traded • The classification of the financial market • By seasoning of claim • Primary market • Secondary market • By nature of market • Debt market • Equity market FIn 351: Lecture 1

  25. Financial markets (continue) • By maturity of claim • Money market • Capital market FIn 351: Lecture 1

  26. The functions of financial markets • Conducting exchange • Providing liquidity • Pooling money to fund large corporations • Transferring money across time and distance • Risk management (hedge, diversify) • Providing information • Providing efficient allocation of money FIn 351: Lecture 1

  27. Conducting exchange • What does it mean ? • Examples FIn 351: Lecture 1

  28. Providing liquidity • What does this mean? • Examples FIn 351: Lecture 1

  29. Pooling money to fund large corporation investments • What does this mean? • Examples FIn 351: Lecture 1

  30. Transferring money across time and distance • What does this mean? • Examples FIn 351: Lecture 1

  31. Risk management • What does this mean? • Examples FIn 351: Lecture 1

  32. Providing information • What does this mean? • Examples FIn 351: Lecture 1

  33. Providing efficient allocation of money • What does this mean? • Examples FIn 351: Lecture 1

  34. The cost of capital • The cost of capital is a very important concept in capital budgeting. • It links investment opportunities in financial markets and investment opportunities in real assets markets. FIn 351: Lecture 1

  35. What is the cost of capital? Cash Investment opportunity (real asset) Investment opportunities (financial assets) Firm Shareholder Invest Alternative: pay dividend to shareholders Shareholders invest for themselves FIn 351: Lecture 1

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