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Slieds & notes on 10/4/2005

Defination of Finance

• Booby of facts, theories and principles dealing with the raising and the using of money by individuals, businesses, and governments.
• accounting + economics + strategy = finance

Finance decisions & Poop

• Investment decision
  • Investing money, must consider initial investment, returns, and risk
  • operational risk: the risk of failure
• Financing decision
  • Financial risk: risk of default on the loan
  • Where you can get the capital

Note: if there is high operational risk, banks are unlikly to take on high financial risk as well.

Three brances of finance

• Corporate/business finance
• Investments
  • make similar decisions as corporate finance, but instead of managing a company, you're managing an investment portfolio
• financial markets & institutions
  • not covered

Forms of business organization

Sole proprietorship

• businesses which are owned by a signle individual and all benefits / losses are transferred to that individual
• Advantages
  • easy to start
  • organizational simplicity
  • single taxation
• Disadvantages
  • unlimited liability
  • limited managerial expertise
  • limited life

Partnership

• advantages
  • same as above
  • deeper pockets, more minds
• disadvantages
  • "Joint & several" liability
  • Limited managerial expertise
  • Limited life

Corporation

• An artifical being
• Advantages
  • Limited liability
  • Unlimited life
  • Diverse managerial expertise
• Disadvantages
  • "Red tape"
  • Organizational complexity
  • Double taxation (KEY DISADVANTAGE)
    • Not a universal truth

Corporate structure

• See page 10.
• Know Agency problem
  • When manager's interests are not always in the interest of the owners

The most impotant part of the first chapter

• GOAL: Maximize shareholder wealth
  • Note, this isn't always the case abroad
• Justifications
  • "Capital" in capitalism - returns should go to the owners of the company
    • VS. communism where the returns should go to those who provide the labor in a company
  • Residual claim
    • Only situation where the proper incentives are in place
    • Full information set
  • Efficient markets
    • investors invest in those companys that have the best return

Slides & notes on 10/5/2005

Users of Financial Data

• Corporate managers
• Investors
• Credit managers
• Other firms

Performance Measurement

Absolute vs. relative performance

• Common-size statements
• Traditional financial RATIOS

Relationship between performance items

• duPont analysis
• sustainable growth analysis

Comparative performance

• Across time (time-series analysis)
• Across companies (cross-sectional analysis)

Accounting vs. economic performance

• Economic value added (EVA)