INDEX
1. Finance Overview.
2. Defining Finance.
3. Corporate Finance.
4. Investment: Assets.
5. Resources: Equity and Liabilities.
6. Relationships between Investment and
Financing
7. Functions of the Financial Manager.
Pg. 1
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Reasons to study Finance:
• To manage your personal resources.
•To set up a new business.
•To pursue interesting and rewarding career opportunities in
Finance.
Pg. 2
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Defining Finance
The field of Finance deals with the concepts of time, money, and
risk and how they are interrelated. It also deals with how money is
spent and budgeted.
Finance….
• is analytical.
• is based on economic principles.
• uses accounting information as an input for decision-making.
• is global in perspective.
• is constantly changing.
• is the study of how to invest and raise money productively.
Pg. 3
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Defining Finance
Concept of Finance:
Finance Theory is the study of the behaviour of individuals in the
intertemporal allocation (over time) of their resources in an
uncertain environment, and the study of the function of economic
institutions and markets in making these allocations possible.
EconomíaFinanciera
Marín, José M. / Rubio, Gonzalo
Antoni Bosch, Editor, Barcelona, 2001
Pg. 4
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Defining Finance
Finance can be divided into three main related areas:
Corporate finance: Refers to the acquisition, financing
and investment management. Require the use of
knowledge of economics, accounting, law, financial
mathematics and statistics, among others.
Financial Markets and Institutions: Includes the study
of the banking system and markets.
Assets evaluation: Estimating the value of assets
through models. Very useful for making financial decisions.
Pag 5
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Corporate Finance
Is about financial decisions made by corporations.
Corporations face two broad financial questions:
•What investments should the firm make?
•How should it pay for those investments?
•Financial managers are concerned with:
- Investment Decisions (use of funds): The buying,
holding or selling of types of assets.
- Financing Decisions (acquisitions of funds).
Pag 6
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Corporate Finance
The discipline can be divided into long-term and shortterm decisions and techniques (according the time
horizon)
•Long-term
decisions:
Which
projects
receive
investment. Whether to finance that investment with
equity or debt when or whether to pay dividends to
shareholders.
•Short-term decisions: Deals with the short-term
balance of current assets and current liabilities. The focus
here is on managing cash, inventories, and short-term
borrowing and lending.
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Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Corporate Finance: Real Assets and Financial Assets
The financial manager needs real assets and financial assets:
Real assets: These are used to produce the firm's products
and services. They include tangible assets such as Machinery,
Factories,
Vehicles, and Offices. Furthermore, real assets
include intangible assets such as Technical knowledge
(intellectual property IP), Trademarks, and Patents.
Financial assets: The firm finances its investments in real
assets by issuing financial assets (bonds, shares, etc) in the
financial market for investors. A share or stock is a financial
asset which has a value as a claim on the firm's real assets and
on the income those assets may produce.
Pg. 8
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Corporate Finance
Financial
manager
The financial manager stands between the
firm’s operations and the financial (or capital)
markets, where investors hold the financial
assets issued by the firm.
Pg. 9
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Corporate Finance
ASSETS
FINANCING
€
Shares
Loans
Working
Capital
Bonds
MANAGER
FINANCIAL ASSETS
Pg. 10
FINANCIAL ASSETS ENABLE FINANCING TO BE DIVIDED
INTO AFFORDABLE PRODUCTS FOR INVESTORS
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Quiz
Fit each of the following terms into the most appropriate space:
financing, real, shares, airplanes, financial, investment, brand
names.
Companies usually buy ________ assets. These include both
tangible assets such as ____________ and intangible assets
such as __________________. In order to pay for these assets,
they sell ______________ assets such as _________.
The decision regarding which assets to buy is usually termed the
__________ decision . The decision regarding how to raise the
money is usually termed the _____________ decision.
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Investment or Assets.
ASSETS
INVESTMENTS
Fixed Assets
ASSETS
Tangible
Intangible
Financial
Current
Assets
Inventories
Accounts
Receivable
Cash
Pg 12
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Investment or Assets.
ASSETS
INVESTMENTS
Assets are resources (money, properties or rights) of the
business enterprise.
Assets fall into one of two categories:
• Current assets
• Fixed or non-current assets
Current assets are assets that can be turned into cash in one
operating cycle.
Non-current assets are all other assets; that is, assets that
cannot be liquidated quickly.
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13
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Investment or Assets.
Current assets are likely to be used or turned into cash in
the near future.
Fixed assets have a gross and a net value. The Gross Value
is what the assets originally cost, but they are unlikely to
maintain their value. Accountants must estimate the
depreciation in the value of these assets.
The company also has valuable intangible assets, such as
its brand name or skilled management and is called
goodwill.
Pag
14
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Investment and Assets.
Example:
ASSETS
Non-Current Assets:
Property and equipment
Minus accumulated depreciation
Net-Non Current Asset (fixed assets)
Net intangible assets
Other fixed assets
Current Assets
Inventories
Accounts receivable
Other current assets
Cash and equivalent
Total Assets
Pag
15
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Resources: Equity and liabilities
FINANCIAL STATEMENT
RESOURCES
Common Stock
Retained Earnings
Long Term Debt
Bank Loans
Other long term
liabilities
Short Term
Liabilities
Long Term
Liabilities
RESOURCES
Short Term Loans
Accounts Payable
Other Current
Liabilities
Pág.
16
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Resources: Equity and liabilities
Equity = ownership of the business enterprise.
The difference between assets and liabilities represents the
amount of the shareholders´equity.
Every corporation has common equity.
Equity also includes retained earnings or capital in excess .
Pag
17
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Resources: Equity and liabilities
Liabilities are obligations of the business enterprise. They
are either current liabilities or long-term liabilities.
Current liabilities are obligations due within one year.
1. Accounts payable are amounts due to suppliers for
purchases on credit.
2. Wages and salaries payable are amounts due to
employees.
3. Short-term bank loans or current portion of long-term
debt.
Pag
18
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Resources: Equity and liabilities
Long-term liabilities are debts that last more than one year.
There are different types of long-term liabilities, including:
1. Payable notes and bonds, which are loans in the form
of securities.
2. Bank loans.
Pag
19
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Resources: Equity and liabilities
Example:
EQUITY & LIABILITIES
Equity
Common stock (shareholder equity)
Retained earnings
Non-Current Liabilities
Long-term debt
Bank loans
Other long-term liabilities
Current Liabilities
Short-term loans
Accounts payable
Accrued income taxes
Other current liabilities
Total Equity & Liabilities
Pag
20
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Balance Sheet
•The balance sheet is a report of the assets, liabilities, and
equities of a firm at a point in time (generally at the end of a
fiscal quarter or fiscal year).
• The balance sheet is made up of assets, equity, and
liabilities.
ASSETS
EQUITY & LIABILITIES
Non-Current Assets:
Equity
Property and equipment
Common stock (shareholder equity)
Minus accumulated depreciation
Retained earnings
Net-Non Current Asset (fixed assets)
Non-Current Liabilities
Net intangible assets
Long-term debt
Other fixed assets
Bank loans
Other long-term liabilities
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Current Assets
Current Liabilities
Inventories
Short-term loans
Accounts receivable
Accounts payable
Other current assets
Accrued income taxes
Cash and equivalent
Other current liabilities
Total Assets
Total Equity & Liabilities
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Profitability and Costs of Capital
BALANCE SHEET
EQUITY
Profitability
Rate of Return: R(%)
ASSETS
LIABILITIES
Cost of Capital
(dividends + interest)
K (%)
R (%) - K(%) =
Net Return: r (%)
If R(%) > K(%) or r(%) = or >0
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Introduction to Finance
then the project is feasible
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Two different points of view in Finance
Point of view
of Shareholders
EQUITY
ASSETS
LIABILITIES
Point of view
of the manager
Both want to maximize Net Profit = dividends + retained earnings.
Their opinions differ about the allocation of Net Profit.
Pg. 23
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Functions of the Financial Manager
The financial manager faces three decision areas, which define the
content of Corporate Finance.
- First, how much money should the company invest? What kind of
assets must be acquired? What cash flows are expected? These are
the investment decisions.
- Second, which financing structure is the best? Which is the
length of time that funds will be needed? These are the financing
decisions.
- Third, the financial manager stands between the firm’s
operations and the financial (or capital) markets, where investors
hold the financial assets issued by the firm.
The function of the financial manager is the management of
cash flows to make a profit for the firm´s owners.
Pg. 24
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Functions of the Financial Manager
Financial management requires the coordination of all areas of a
business to effectively benefit the owners. Within a company, financial
decision-making is usually managed by the Chief Financial Officer The
Controller and the Treasurer.
CHIEF FINANCIAL OFFICER (CFO)
Responsible for:
• Financial policy
• Corporate Planning
TREASURER
Responsible for:
• Cash Management
• Raising capital
• Banking Relationships
CONTROLLER
Responsible for:
• Financial Statements
• Accounting
• Taxes
Pg. 25
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini
Functions of the Financial Manager
REAL
ASSETS
CASH
CASH
INVESTORS
FINANCIAL
MANAGER
ACTIVITY OF
THE COMPANY
CASH
CASH
FINANCIAL
ASSETS
Remuneration
and repayment
of funds
Pg.
26
Introduction to Finance
Department of Finance and Operations Management
Instructor :Martha Edith Bellini