Finance 300 Master Deck

The Four Types of Finance

Corporate Finance, Investments, Financial Institutions, International Finance

Corporate Finance

Covers a wide variety of topics in relation to finance, and all aspects of business. “business finance”

Investments

Involves the financial assets and their valuation and management.

Financial Institutions

Businesses that deal primarily in finance, ie, insurance companies, banks

International Finance

Becoming more and more relevant with society, has to do with conducting financial business with other countries.

How does finance interact with other areas of business?

Each aspect of business has ties to financial principals, and help business to operate.

What are some ways in which the lines of business such as marketing and management use financial management in everyday practice?

Marketing and management use financial management daily to allocate budgets, price products, track campaign performance, and control operational costs.

What is business finance?

The practice of managing finances within a business in order to remain operationally efficient.

What does the CFO do?

The CFO strategizes and manages the flow of cash within a business in a combination of: Costs and financial accounting. & Cash and credit, financial planning, and capital expenditures

Capital Budgeting

Involves strategizing the long term financial investments that a company needs to operate, and how to manage them & concerns knowing and planning present and future cash flows to pay for future costs.

What are three aspects of capital budgeting?

The timing, amount, and likelihood (risk of not receiving) cash flows.

Capital Structure

Involves the process of obtaining funding for a firm in reference to its financial investments. An organization wants to determine how much of this allocation will need to be borrowed, and how much it will cost to secure necessary funding.

Financial Managers

Want to find the cheapest way of obtaining capital

Working Capital Management

Managing a firm’s working capital is a daily activity that allows for a firm to maintain business operations without interruption of service, it ties into the daily cash management that is needed; primarily focused on short term assets and liabilities.

Types of Business Organizations

Sole Proprietorship, Partnership, Corporation

Sole Proprietorship

A type of business owned by one person, the owner obtains all profits, but has unlimited liability for all debt

Partnership

Similar to a sole proprietorship, however involves two or more people. Different types can be a general partnership and limited partnership

What is the risk of sole proprietorships and partnerships?

There is a risk of unlimited liability for all debts, and can be limited by inability to raise cash or investment.

Corporation

A legal “person” which is separate from other owners, and assumes all financial and legal responsibility. They can own assets, owe liabilities, sue, and buy stocks. Formed via Articles of Incorporation. A disadvantage is that it must pay taxes.

Goals of Financial Management

Primary goal is increasing the market value of existing owner's equity, this can be done via profit maximization - increasing the value of company stock. The goal is to make sound financial decisions making the business more profitable without increasing costs.

Financial Management and Ethics

Sarbanes-Oxley act of 2002: contains a number of requirements designed to ensure that companies do not mislead in their financial statements. Does not apply if a corporation is publicly traded. Two officers of a public corporation must sign and “certify” that an Annual Report does not contain misleading or false data.

Finance and Stockholder Management

Stockholder and management goals should be closely aligned. Stockholders rely on finc managers of a company to increase stock on their behalf (An Agency Relationship). Finc managers must consider new investment opportunities & find the balance between the potential stock price increase and risks and costs that may come with these investments.

Management and the Agency Relationship

Management wants an increase in stock value - leads to increased compensation for those at the top. The ethics of maintaining the goals of the actual stockholders and those financial interests of management is key to an organization’s success. If stockholders do not believe that Management is acting in the interests of their goals, they can look to have them replaced via a proxy fight, or via a takeover.

Financial Markets and the Corporation

Financial Markets bring buyers and sellers of equity (stocks) and debt (bonds) securities together. There are different types of markets (primary and secondary). Equities are only issued by Corporations, while debt securities can be issued by both Corporations and Government bodies.

Primary Market

Original sale of government and corporate securities from the original issuer

Secondary Market

Markets in which securities are bought and sold after the initial sale.

Primary Market Transactions

Occur in order to raise cash for a corporation. Public offering – involves selling securities to the general public, and requires registration with the Securities and Exchange Commission. Private placement – The sale of securities to a private buyer in order to avoid regulatory and public offering costs. Examples would be mutual funds.

Secondary Markets

One seller and one buyer. Critical to most organizations, as it continues the sales of the securities within the financial markets.

Dealer vs Auction Markets (secondary)

Dealer versus auction markets: Dealer markets are also referred to as OTC (Over the Counter) and is primarily done by the Dealer. Auction markets are an official place, such as the New York Stock Exchange (NYSE), and involves the practice of matching sellers to buyers.

Famous Markets

NYSE (auction), NASDAQ (dealer), Tokyo/London Stock Exchanges (intl OTC)

Financial Statements Overview

The reporting mechanisms of a corporation/company, and offer insights into cash flow, assets/liabilities, and provide frameworks for making sound financial decisions. Used as a basis to make long and short term financial decisions for the longevity of a corporation.

Balance Sheet

Is essentially a snapshot of the firm that organizes and summarizes key information showing assets, liabilities, and equity.

Assets (balance sheet)

Summary of what a firm owns, typically shown on the left side of a Balance Sheet.

Liabilities

Summary of what the firm owes.

Equity

The net difference between the firm’s assets and liabilities, and can be a positive or negative number.

Current Assets

Fixed Assets