Professional Documents
Culture Documents
CHAPTER OUTLINES
Capital Markets &
Corporation
Financial Planning,
Forecasting & Budgeting
Cost control
Time value of money
Accounting
Dual accounting and finance function,
preparation of financial statements
Management
Strategic thinking, job performance,
profitability
Personal finance
Budgeting, retirement planning, college
planning, day-to-day cash flow issues
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
investments?
How will we manage the everyday
financial activities of the firm?
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 companys
stock?
MANAGING MANAGERS
Managerial compensation
Incentives can be used to align
management and stockholder interests
The incentives need to be structured
carefully to make sure that they
achieve their goal
Corporate control
The threat of a takeover may result in
better management
Other stakeholders
MANAGING MANAGERS
FINANCIAL MARKETS
Cash flows to the firm
Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter
securities
NYSE
NASDAQ
FINANCIAL 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?
COST CONTROL
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
TYPES OF INTEREST
Simple Interest
Interest paid (earned) on only the
original amount, or principal,
borrowed (lent).
Compound
Interest
SIMPLE INTEREST
What is the Present Value (PV)
of the previous problem?
The Present Value is simply the
$1,000 you originally deposited.
That is the value today!
Present Value is the current value of a
future amount of money, or a series of
payments, evaluated at a given interest
rate.
SIMPLE INTEREST
EXAMPLE
Assume that you deposit $1,000 in
an account earning 7% simple
interest for 2 years. What is the
accumulated interest at the end of
the 2nd year?
SI
= P0(i)(n)
$1,000(.07)(2)
=
= $140
WHY COMPOUND
INTEREST
COMPOUND INTEREST
FV1 = P0 (1+i)1
(1.07)
= $1,000
= $1,070
Compound Interest
You earned $70 interest on your $1,000
deposit over the first year.
This is the same amount of interest you
would earn under simple interest.
TYPES OF ANNUITIES
Ordinary
EXAMPLE OF ANNUITIES
AMORTIZING LOAN
1.Determine Interest Expense -Interest expenses may reduce
taxable income of the firm.
2.