Introduction to
Financial Management
Bill Klinger
Introduction to Financial Management
• Introductions
– Me
– You
• Syllabus
• Class procedures
• Class expectations
– A recent study showed that 83% of people who lost
their job, lost it because of attendance or attitude.
• Daily
– Listen to 1130 AM
– Watch CNBC
Goal of the Firm
• Goal of the firm – “Maximize shareholder wealth”
– Why not maximize profits?
– Why not maximize sales? Market share?
• How will we measure this?
– Stock price
• What influences this measure?
– Profits
– Future expectations of performance
• How does this goal benefit society?
Five Principles of Finance
1. Cash flow is what matters
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Difference between profits and cash flow
Care about incremental cash flow
2. Money has a time value
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Dollar today is worth more than a dollar tomorrow. Why?
Opportunity cost
3. Risk requires reward
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Return for delaying consumption
Return for taking risk – investors & business people hate risk
Risk requires expected return
Exp return
Risk
Five Principles of Finance
4. Market prices are generally right
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Markets fully reflect all available information at any instant in time
Efficient market hypothesis
Stock prices can be used to measure the value of a firm
5. Conflicts of interest cause agency problems
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“Agents” are managers who act on behalf of the owners
Problem due to separation of ownership and management
May result in conflicts of interest
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E.g. managers may try to keep jobs rather than max firm wealth
E.g. managers may work to get a bonus
Should be monitored by Board of Directors
Recent Lessons
• Cash flow is what matters
– Dot com bubble
• Money has time value
– Daily purchase decisions
• Risk requires reward
– Financial crisis and over-leveraging
– Long-Term Capital Management, Lehman Brothers
• Market prices are generally right
– Many hedge funds bet against the market… and lost
• Conflicts of interest cause agency problems
– Runaway executive compensation
– Enron
Finance
• Primarily about managing money
• Also about management and interpretation of data
• Chief Financial Officer, CFO
– Controller
• Accounting
• Data processing
– Treasurer
• Cash management
• Financial planning
Corporate Forms
• Sole proprietorships
• Partnerships
– General
– Limited
• Corporations
– Legal entity separate and apart from its owners
• Limited Liability Companies, LLCs
Financial Markets
• Capital markets
– Financial institutions that help raise long-term capital
– Long-term means longer than one year
• Ways to transfer capital
– Direct transfer
• Angle investors, Venture Capitalists
– Indirect transfer using investment banker
• Syndicates will buy entire issue of securities and re-sell them
– Indirect transfer using financial intermediary
• Intermediaries hold investments for individuals
• E.g. insurance companies, mutual funds, pension funds
Financial Markets
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Regulated by the Securities and Exchange Commission (SEC)
Public vs. private placement
Primary vs. secondary markets
Money markets
– T-bills, CDs, commercial paper
– Mature in less than one year
• Spot vs. futures markets
• Organized security exchanges
– Have a physical presence
– E.g. NYSE, AMEX, …
• Over-the-counter markets
– Informal network of broker/dealers
– NASDAQ
Investment Banking
• Investment banker
– Specialist who underwrites new securities
– Consultant on new offerings
• Underwriting
– Purchase and resale of new security issues
– Risk of resale at a profit assumed by investment banker
– Syndicate – group of underwriters
• Spread
– Difference between price paid to company and price sold at
Intro to Excel
• Basics
– Arithmetic
– Cell references
– Color
• Practical usage
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One period with interest rate
Multiple periods with interest rate
Multiple periods with interest rate and constant additions
Name cells
Income statement
Multiple period income statements with growth rates