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TCHE302(2-1112).1_LT
Lecturer: MSc Nguyen Thu Thuy The Faculty of Banking and Finance Email: nguyenthuthuy279@gmail.com
Outline
1. Introduction to Finance 2. The Time Value of Money 3. The Financial System 4. Valuation 5. Introduction to Corporate Finance
1. Introduction to Finance
1.1. What is Finance? 1.2. Time and Risk 1.3. Unifying Principles of Finance 1.4. Financial Management 1.5. Forms of Business Organization
A business decision means Valuation of assets (the central issue of finance) Management of assets
Financial Assets - Means by which investors hold the assets of the economy (corporate bonds, stocks,)
of an economy
Land Buildings
Machines
Knowledge
Investment decisions
How to grow wealth? How to allocate wealth over states?
Financing decisions
How to finance consumption and investment?
Financing decisions
How to finance a project?
Payout decisions
What to pay back to shareholders?
Households
(4)
(5)
(5)
(4)
Value of an asset = Value of its cash flow Value of investment = Value ({CF0, CF1, , CFn})
Free access
Competitive trading process No frictions/constraints in trading (frictionless markets)
st 1
principle: No Arbitrage
Examples:
HSBCs 3 month lending rate is 5.85% and Citibank is selling 3 month
CDs at an interest rate of 6%.
Given any pair of cash flow, a household can decide which one is
better
Controller:
cost
accounting,
financial
Capital Structure
How should we pay for our assets?
Debt or Equity?
Minimize costs?
Maximize market share? Maximize the current value of the companys stock?
Partnership
General Limited
Corporation
S-corp Limited liability company
Sole proprietorship
Advantages
Easiest to start Least regulated Single owner keeps all the profits Taxes once as personal income
Disadvantages
Limited to life of owner Equity capital limited to owners personal wealth Unlimited liability Difficult to sell ownership interest
Partnership
Advantages Two or more owners More capital available Relatively easy to start Income taxes once as personal income Disadvantages Unlimited liability Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership
Corporation
Advantages Disadvantages Limited liability Separation of ownership and Unlimited life management Separation of ownership and Double taxation (income management taxed at the corporate rate Transfer ownership is easy and then dividends taxed at Easier to raise capital personal rate)
Agency problem
Conflict of interest between agent and principal
Solutions
Tough screening processes
Quick Quiz
1. What are the three types of financial decision? 2. What determines the value of an asset? 3. What are the three major forms of business organization? 4. What is the goal of financial management? 5. What are agency problems and why do they exist within a
corporation?