An Introduction to Basic Finance
Herbert B. Mayo
The College of New Jersey
The 3 Divisions of the Finance Discipline
Finance – the study of money and its
management.
– Financial Institutions
– Investments
– Corporate (business) finance
Sources of Finance
 Balance Sheet – Financial statement that enumerates
what an economic unit owns or owes and its net
worth. A firms financial position
Assets = Liabilities + Equity
 Assets - Items of property owned by a firm,
household, or government and valued in monetary
terms. An economic resource.
 Liabilities - What an economic unit owes expressed in
monetary terms
 Equity - Owners investment in a firm (claim to the
assets); a firms net worth or book value
Risk, Return, and Financial
Leverage
 Return - What is earned on an investment; the
sum of income and capital gains generated by an
investment
 Risk - Possibility of a loss; the uncertainty that
the anticipated return will not be achieved
 Financial Leverage - Use of borrowed funds in
return for agreeing to pay a fixed return; use of
debt financing
Risk and Return
 Valuation - Process of determining what an asset
is currently worth
Goal of management: maximize
shareholder value
Over time, the price of a company’s
stock is indicative of management
performance.