Streetbites from the media perspective
The whole wide world for a real long time has been
accounting for finance!
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Streetbites from the media perspective
 The uses for finance have been growing for millennia!
 See textbook pages 5-6 for related content on this story.
Accountants are known for counting wealth and
recording the flow of funds throughout the financial
landscape since the earliest days of human markets.
Early records thousands from thousands of years ago
document measures of market activity in many places
on the globe.
DEFINITION 1.2 Wealth (noun)
Wealth is any capital or asset that provides returns over time.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
The reason that financial management of worldly
resources is gaining recognition is because financial
science draws the picture of wealth flows and
balances with basic formulas linking the collection of
balance sheets in the financial economy.
Wealth is capital. Some is tangible. Some is not.
It’s all wealth.
Wealth provides return streams. There is a lot of
wealth out there. That means managing wealth is an
increasingly important talent.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
People in the industries below pursue careers
crawling around the many facets of finance. All
pertain to wealth.
Certificate Title
TABLE 1.1 Description
Contact
http://www.cfainstitute.or
g/programs/cfaprogram/Pa
ges/index.aspx
Chartered Financial
Analyst (CFA)
The CFA is a recognized standard of
competency for financial analysts in more
than 70 nations worldwide
NASD Stock
Broker’s License
NASD brokers represent more than 5,500
securities firms with more than 82,000
branch offices across the U.S. Acquiring
the license requires multiple applications
and qualifications
http://www.finra.org/
National Association of
Securities Dealers
Certified Financial
Consultant (CFC)
Recognized by institutions and individuals
as a sign of integrity and professional
excellence. Many employers require the
CFC designation when hiring or
promoting
http://www.ifconsult
ants.org/
Institute of Financial
Consultants
Certified in Financial
Management (CFM)
The CFM is for students, practitioners,
and academicians, that understand
techniques defining the field of finance
www.fma.org
Financial Management
Association
Certified Financial
Planner (CFP)
Holders of the CFP meet rigorous
requirements in banking, estate,
insurance, investment, and tax planning
http://www.cfp.net/
Certified Financial
Planner Board of
Standards
Chartered Financial
Consultant (ChFC)
Granted to individuals completing a
comprehensive 10-course practical
program that includes economics, taxes,
insurance, and investing
www.financialpro.org
Society of Financial
Services Professionals
Chartered Life
Underwriter (CLU)
This is the undisputed professional
credential for persons involved in the
protection and preservation of financial
wealth through life insurance
http://www.theamerica
ncollege.edu/ads/clu
Commodity Trading
Advisor (CTA)
A registered adviser regarding the value
of securities or of the advisability of
investing in securities.
www.securitiesexam.com
Financial Risk
Management (FRM)
Earned by individuals who have been
qualified to legally give clients financial
planning service and advice
www.rims.org
Risk and Insurance
Management Society
Lessons about the Structure of Finance
Association for Investment
Management & Research
The American College
Securities Exam
Preparation, Inc.
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Chapter 1, Unit 1-of-1
What is finance?
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
 What is finance and who uses it? What are the markets like, who are
the participants, and what types of financial securities trade?
 See textbook pages 2-26 for readings relevant to this unit.
Videos for unit 1 (TOTAL: 8@44’09”)
So just what is Finance? (1:28)
The three sources of value (5:41)
The corporate pyramid (7:19)
Subdisciplines and certifications (2:41)
The company cash flow cycle (8:43)
Categorizing financial markets (4:12)
Agency relationships (8:45)
The company objective (5:20)
Chapter 1: Introduction to Finance
1. So just what is “finance” anyway?
DEFINITION 1.1 Usage of “finance” in common vocabulary
(verb): To finance means the act of borrowing money.
Example: How did you finance your car?
(noun): Finance is the study of wealth management.
Example: This book explains basic principles of finance.
DEFINITION 1.2 Wealth (noun)
Wealth is any capital or asset that provides returns over time.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
A small sampling of big wealth includes about 9,000
corporations that publicly list shares on U.S.A. stock
exchanges.
Sort those 9,000 rows of company data based on the
size of Total Assets on the balance sheet.
The chart on the next page shows the 40 biggest.
The country’s largest nonfinancial corporations
(“NFC”) are the 6 red rows in the table. The NFCs
make the real goods and services for the real
economy that spreads across the landscape of
households, industries, institutions and governments.
A significant share of the return from human industry
and discipline is found throughout the NFCs.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
$3,270,108 means $108 million + $270 billion + $3 trillion!!
That’s a lot more Total assets than AAPL and XOM!
QUERY: Can you identify these 6 NFCs?
Ticker
Symbol
3FNMA
JPM
DB
BAC
3FMCC
C
SAN
WFC
UBS
MET
TD
RY
MS
BNS
GE
AIG
BMO
BRK.B
CM
BK
USB
XOM
PWCDF
POFNF
GWLIF
PNC
COF
HIG
T
VZ
CVX
STT
LNC
DDAIF
VOYA
BLK
PFG
AAPL
WMT
F
SLF
NTIOF
BBT
STI
Assets Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Employee Net Income
s
(Loss)
3,270,108
2,415,689
2,220,348
2,102,273
1,966,061
1,880,382
1,537,238
1,527,015
1,134,164
885,296
862,532
860,819
832,702
743,788
656,560
541,329
537,299
484,931
398,389
374,310
364,021
346,808
345,005
341,711
325,905
320,296
297,048
277,884
277,787
274,098
253,753
243,291
236,945
232,201
221,023
219,873
208,191
207,000
204,751
202,026
199,531
188,204
183,010
175,335
Lessons about the Structure of Finance
7.4
251.196
98.254
242.117
5.112
251
182.958
264.9
60.205
65
78.748
79
55.794
83.874
307
64
45.631
330.745
43.039
51.1
65.565
75
33.2
31.68
20.97
54.433
41.951
18
243.36
176.8
64.6
29.4
9.115
274.616
7
11.4
14.792
84.4
2200
181
15.52
19.691
33.7
26.281
83963
17923
917.681
11431
48668
13673
6021.423
21878
3562.444
3368
6557
8331
2932
6422
13057
9085
4183
19476
3403
2111
5836
32580
1029
2027
2408
4220
4159
176
18249
11497
21423
2136
1244
9427.592
600.5
2932
912.7
37037
16022
7155
1060
1479
1679
1344
Sales/Turnover
(Net)
122606
105790
58811.528
101697
75311
92543
91875.617
88069
39548.518
68180
30744
38760
36848
28417
142937
67375
20851
182042
16984
15326
21059
390247
29642
28830
26421
16872
24176
25949
128752
120550
211664
10295
11883
162567.398
8671.5
10180
9156.1
170910
474259
146917
13489
7098
10413
8602
Market Value - Total Fiscal
17332
219657
49172
164914
9425
157854
102794
238675
72538
60500
87750
100949
60991
76612
282006
74740
46777
292405
35413
39910
73720
438702
14705
25602
32730
41350
43873
16423
183757
140639
239028
31861
13571
92985
9198
53396
14556
428700
241440
60853
22864
14747
26371
19734
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
ANSWER: Of course, GE is General Electric, XOM is Exxon-Mobil, AAPL is Apple Inc., WMT is
Walmart, F is Ford and T is AT&T. Some of these iconic corporations are old, some new!
QUERY: Understanding the magnitude of wealth
measurements is important for making decisions
small or large. How much is 3 trillion?
ANSWER: Imagine 1 dollar bill for every tree on
the planet!
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
QUERY: If only 6 of the 40 biggest balances sheets
are NFCs making real goods and services then what
are the other companies doing with their wealth?
ANSWER: They are financial corporations that
shuffle or hold wealth finding a way to grow!
Some exclusively own financial assets on the balance
sheet while others also own real estate etc. Primarily,
though these are “Paper on the left, paper on the right
companies.” Some employ a dozen employees,
others tens of thousands. Some issue widely held
stock, others issue to a handful of owners. These
companies provide financial services and products.
There is so much global wealth that its scale
is seemingly incomprehensible: 107 or more!
Financial science writes the web of formulas
that unite these balance sheets into one!
Every science has its golden age and today is
the golden age for financial science
because the times determine the very questions asked and
today, for finally the first time in human history,
planetary needs require
real solutions from financial economics
instead of imaginary numbers from politico-economics.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Wealth and capitalized economic value
accumulate from 3 unique processes.
2. Financial Fundamentals of Accounting
12. Financial
Arbitrage
3. Accounting for Growth
Arbitrage
Value
11. Determination
of Equilibrium
Returns
10. Measuring Risk, Return,
and Diversification Benefits
Transformation
Value
4. Time Value and Relations
Between Returns
Time
Value
5. Future and
Present Values of
Annuities
6. Time Value Application 1,
Capital Budgeting
9. Buy-Side Demand, Sell-Side
Supply, and Rationale for Financial
Market Equilibrium
7. Time Value Application 2, Bond
Valuation
8. Time Value Application 3, Stock
Valuation
FIGURE 1: Chapters pertaining to the three sources of value
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
FF2 and the three sources of value
Time value is the simple worth of an asset and is sustained as the present
value of future cash flow streams.
Transformation value is the value-added by combining different inputs to
produce a unique output. A special case of transformation value is the
diversification benefit from combining security cash flow streams.
Arbitrage value exists when prices or rates in different markets misalign,
thereby providing a temporary opportunity for instantaneous profit.
FF2 Three sources of value
What are the three sources of financial value?
a. time value, investments, and financial planning
b. time value, transformation value, and arbitrage
c. arbitrage, hedging, and speculating
d. investments, corporate finance, and institutions
e. financial accounting, risk & insurance, and real estate
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Open the textbook online or in print and READ section 1.A really
quickly. There are links in the online pdf version sometimes to
sites or documents relevant and timely to the curriculum.
For many students this is your first finance course. What is finance?
The corporate pyramid FF29
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Board of Directors (IBM, 1996)
Cathleen Blac k , Pres ident of Hears t Magaz ines
Harold Brown, General Partner atW arburg, Pinc us & Co.
J uergen Dormann
, Chairman of Hoec hs t AG
Louis Gers tner, J r., Chairman of the Board and CEO of IBM
Nannerl Keohane,Pres ident of Duk e Univ ers ity
Charles Knight, CEO of Emers on Elec tric Co.
Luc io Noto, CEO of Mobil Co.
J ohn Slaughter, Pres ident of Oc c idental College
Alex Trotman, CEO of Ford Motor Co.
Lodewijk v anWac hem
, Chairman of Roy al Dutc h Petroleum C o.
Charles Ves t, Pres ident of Mas s . Ins titute of Tec hnology
Chief Executiv e Officer (CEO)
Louis Gers tner
senior management that report directly to the CEO
Software Operations
Human Resources
Strategy
Research
J ohn Thomps on
Thomas Bouc hard
Bruc e Harreld
Paul Horn
General Counsel
Lawrenc eRic c iardi
Chief Financial
Officer (CFO)
PC Operations
Richard Thoman
Communications
Marketing
Dav id Kalis
Robert Stephens on
Abby Kohns tamm
Server Operations
Sales & Service
Nic holasDonofrio
Ned Lautenbac h
FIGURE 1.1 Finance in the corporate hierarchy
Figure 1.1 takes a perspective focusing on the “finance group”
within the corporate pyramid. This particular hierarchy is for IBM,
but the layout is fairly typical of any large corporation.
Figure 1.2 shows typical units within the finance group.
Chi ef Fi nanci al O f f i cer
O f f i ce of t he Cont rol l er
O f f i ce of t he Treasurer
Depar t ment s t hat r epor t t o t he Cont r oller
Tax Management
I nf or mat ion Mgmt .
Cost Account ing
Payr oll
Depar t ment s t hat r epor t t o t he Tr easur er
Cash Management
Capit al Budget ing
Cr edit Management
Financial Planning
FIGURE 1.2 The finance team in the company
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
One other perspective sees sub-disciplines traditional to finance
Corporate Finance — topics include working capital management, capital budgeting,
obtaining financing, capital structure decisions, and dividend payout policies;
Investments — topics include company and security analysis, portfolio theory and
management, futures and options;
Markets and Institutions — topics include banking, analysis of interest rates, and financial
market microstructure;
Specialty Areas — topics include real estate, insurance, law and financial economics,
personal financial planning, enterprise finance, risk management, etc.
Yet another traditional categorization sees diverse financial markets
distinguishing
criterion
category 1 &
description
category 2 &
description
new vs. seasoned
security
primary market,
stocks & bonds issued
by company to investor
secondary market,
stocks & bonds sold by
one investor to another
investor
capital market,
financing repayable in
more than one year
equity market,
stocks that do not
specify repayment but
instead represent a
claim on residual cash
flows
length of financial
contract
type of repayment
promise
money market,
financing repayable
within one year
credit market,
trade credit, notes, and
bonds that stipulate
specific payments and/or
interest
TABLE 1.2 Common schemes for categorizing financial markets FF25
Principal – agent relationships, costs, and control mechanisms
are essential to discussions of wealth management
An agency problem potentially exists when a source of financing delegates
decision-making authority for using the funds. The source that owns the funds is called
the principal and the decision-maker controlling the funds is called the agent. A
principal-agent relationship exists when the owner of wealth is different from the
controller of wealth.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Several control mechanisms help align management and shareholder interests.
1. shareholders can lobby to fire management
2. managers can be given clever incentive compensation contracts
3. shareholders can closely monitor and/or restrict managerial decisions
4. languishing stock prices can increase the threat of take-over
5. managers wish to maintain pristine reputations for the next job
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
Several control mechanisms help align creditor and management/shareholder interests.
1. threat of bankruptcy induces fiduciary responsibility
2. restrictive covenants stipulate precise uses for creditor financing
3. managers wish to maintain a good reputation so they can borrow again
Several control mechanisms help align employee and management/shareholder
interests.
1. threat of litigation induces fiduciary responsibility
2. assignment of pension contributions to third parties
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910
RULE 1.1 The objective for company management -- What should it be?
Management or the Directors should pursue policies that do what? Maximize wealth for the self, or the
team, or the shareholders, or the company, or the client, or the community, or the country? What? To get
your head around this q&a, imagine a dynamic setting wherein economic profit equals zero.
DEFINITION 1.3 Economic profit
Economic profit equals the difference between company revenue and total economic costs of production.
Economic profit (or loss) exists when the company passes revenues on to capitalists and stakeholders
that is greater (or less) than the minimum amount they were willing to receive for its provision.
FIGURE 1.3
The Company Cash Flow Cycle
RULE 1.1 The objective for company management
Management should pursue policies that maximize company wealth creation irrespective of the
distribution of economic profit, balancing interests among stakeholder, capitalist, company and self. FF31
Traditional view: When stakeholders in real asset markets face perfectly competitive situations then all
economic profits flow to the capitalists. Capitalists in pursuit of profits provide the resources required for the
growth of occupations, businesses, industries, and set the direction for growth of the economy. The
objective of managers is to maximize the share price.
New view: Under the shadow of diverse principal-agent relationships the objective of managers is to
transact with stakeholders and capitalists at fair prices and rates and maximize wealth creation, irrespective
of its distribution. The creation of wealth is made possible by the demand of individual economic agents for
the goods and services that enhance the quality of life. Company objective: Maximize wealth creation by the
company, irrespective of the distribution of economic profit by balancing the interests of participant
stakeholder markets, capitalist markets, and company consumption.
Lessons about the Structure of Finance
©2016 BVT Publishing https://www.bvtpublishing.com/book/910