The Cost of Money Money is not free What is Finance? Authors say: L. J. Gitman quoted as, "Finance can be defined as the art and science of managing money. Finance is concerned with the process, institutions, markets and instruments involved in the transfer of money among and between individuals, businesses and governments." E.W. Walker stated as, "Activities of a business concern relevant to financial planning, coordinating, control and their application is called finance." Schall & Hally said that "Finance is a body of facts, principles and theories dealing with raising and using of money by individuals, businesses and governments. Others say: https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-finance-definition/ Money is not free Types of Finance Types of finance: https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-finance-definition/ Corporate Finance Business Finance Money is not free Forms of Business Forms of Business: Book# page# 10 https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-finance-definition/ • Public Limited company • Managed by Managers • Mangers appointed by Owners(shareholders.). Money is not free Organogram of the Corporation: Money is not free Organogram of the Corporation: Money is not free Organogram of the Corporation: • What does a Finance Manager do: • Page : https://www.roberthalf.com.au/employers/finance-accounting/finance-manager-jobs Money is not free Money is not free Two friends planning How will the coffee shop look like? Fixed Asset Coffee Machine Table Furniture and Fixtures Wiring Interior Decoration Current Asset coffee sugar Milk Powder Light Money is not free Two friends planning From where the money will come? Debt Equity Money is not free Factors Affecting The Cost of Money 3. when the shop started – how to manage, fixing the price, selling method. 4. how are they going to share the return. 1. what assets: capital budgeting • decisions reagrding the invest of fixed assets. 2. Capital structure: How much debt and how much equity.. • How much debt and how much equity.. Working Capital Management Management of Current assets and Current Liabilities • Management of Current assets and Current Liabilities 4. how to share the return Dividend policy decision • How to share the earnings Money is not free Activities: Money is not free Activities: Money is not free Activities: Money is not free Activities: Money is not free Activities: Money is not free Activities: Money is not free Activities: Capital budgeting- managerial finance Capital structure- little bit covered here. Detail in corporate finance - different sources of fund. - we will cover some theoretical parts here. - okay lets see from sources of fund. - debt and equity, internal , external. Lets look at some example. Detaiil in next class. - where to go to get the fund financial mrket what is it? Lets go to book. ----------------------------types of financial market. Factors which will yield a return to the stock owner if the stock has appreciated. [Can you give me anMoney is not free example?] Bonds Companies and governments issue bonds to get Affecting The Cost of Money cash today in exchange for money in the future. Unlike stocks, bonds do not give the owner of the bond any ownership claim—it is only a loan. The value of a bond to the person who buys it is based on its maturity, par value, and coupon payments. Maturity is the length of time until you are paid a fixed amount of money. That fixed amount of money is the par value (sometimes called face value). Sometimes bonds give the owner an occasional payment called a coupon payment. For example, Joe buys a bond for \$100$100dollar sign, 100 that has a oneyear maturity. Its face value is \$110$110dollar sign, 110 and pays a \$1$1dollar sign, 1 coupon every six months. Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Time Value of Money Suppose I offer you the choice of taking tk.1,00,000 from me today, or taking this same sum from me after a year. What decision will you make? If you chose to take the sum today, you’ve made the right choice. There are 2 reasons why taking up the first option is better – Money is not free Time Value of Money High purchasing power – Because of inflation, it’s safe to consider that an amount of money can get us more services and goods than it can in the future. You have chosen the first option in the previous example because you understand that tk. 1,00,000 can get you more things today than it will get you a year later. Risks involved– What if, in the previous example, you chose to receive the money a year later, but when you approach me then, I don’t have any money to give to you? This could also happen to you if you lend money to someone, but they go bankrupt before they can repay you. This shows that there is a certain level of risk involved if you choose to get your money at a later date. With these two reasons, we can justify the existence of the concept of the time value of money. Now, let us discuss some components that we’ll need to be able to calculate the time value of money. Money is not free Time Value of Money Components of TVM The key components are as mentioned below – 1.Interest/Discount Rate (i)– It’s the rate of discounting or compounding that we apply to an amount of money to calculate its present or future value. 2. Time Periods (n) – It refers to the whole number of time periods for which we want to calculate the present or future value of a sum. These time periods can be annually, semi-annually, quarterly, monthly, weekly etc. 3. Present value (PV)– The amount of money that we obtain by applying a discounting rate on the future value of any cash flow. 4. Future value (FV)– The amount of money that we obtain by applying a compounding rate on the present value of any cash flow. 5. Installments (PMT)– Installments represent payments to be paid periodically or received during each period. The value is positive when payments have been received and becomes negative when payments are made. Money is not free Factors Affecting The Cost of Money https://knoema.com/atlas/topics/Economy/Sho rt-term-indicators/Inflation-rate?type=maps Money is not free Finance Finance: Finance is the process of proper use and procurement of fund in order to achieve the goal of a business firm/ person/institute. Areas of Finance: Money is not free Money Own from where the money will come: Equity others Money is not free Factors Affecting The Cost of Money Planning finances Here is where the comprehensions are made use of to determine the finances of the company effectively. Decisions need to be taken on how much finance is needed, how it will be sourced, where it will be invested, would the investment bring in profits, how much is anticipated profits and such to decide on a firm plan-of-action. Capital raising This is a vital stage highlighting the importance of corporate finance and decisions taken here will involve assessment of company assets four sources to fund investments. To raise enough capital a company may decide to sell shares, issue debentures and shares, take bank loans, ask creditors to invest etc. Thus, it has serious financial implications on profit and liquidity being related to the short-term funding and managing plans of the company to finance Money is not free Factors Affecting The Cost of Money their resources available in a form that can immediately rather than a form Cost Of Money: The cost of moneybe is exchanged, the that takes timeinor money to realize. If people opportunity cost of holding money hands willing to hold more money in hands for instead of investing it.are Factors Influencing Market Interest convenience, the money supply will Rates contract, Deferred When money increasingconsumption: the market interest rate. is loaned the lender delays spending the money on Market Impact consumption goods. to which time There is a market for According investments preference theory, people prefer goodsbond now to ultimately includes the money market, goods later. Inmarket, a free market there will be a as market, stock and currency market An interest rate is the rate at which positive interest rate. interest well as retail financial institutions like banks. is paid by a borrower for the use of money Inflationary expectations: economies Exactly how these Changes marketsMost function are that they borrow from a lender. in generally exhibit inflation, meaning a given sometimes complicated. However, economists interest rate levels signal the status offewer the goods in the amount ofagree money buys generally that the interest rates yielded economy. As afuture vital tool of monetary policy, than it will now. The borrower needs to by any investment take into account: the riskinterest rates are kept at target levels for – this. If the compensate the lender free cost of capital, inflationary expectations, taking into account variables like inflationary expectation goes up, then the leveland of risk in the investment, and so thedoes investment, inflation, unemployment – the market interest rate and vice versa. costs of the transaction. This rate incorporates for the purpose of promoting economic the deferred and alternative growth and stability. In the consumption U.S., the Federal elements of interest. A basic Reserve (ofteninvestments referred to as ‘The Fed’) interest rate pricing model implements monetary policies largely by for an asset is presented by rate. the following targeting the federal funds This is theformula: in = ir + + rp + each lp. other for rate that bankspecharge Assuming perfect overnight loans of federal funds,information, which are pe is the same for all the market, and this is the reserves held byparticipants banks at theinFed.
