School of Management
Finance
FINANCE
Zvi Bodie
Robert C. Merton
1
School of Management
Finance
 About
the instructors
 About the TA
 About the course
 About the requirements
– 20% assignment & class performance
– 15% mid-term test
– 65% final test
 About
the book and authors
2
 课程概况
四川省精品课程
金融学基础
UESTC
课程性质：
学科基础课
学时与学分：
64学时，4学分
上课时间：
周二、周四上午3-4节
作业要求：
个人作业（英文）与小组作业
3
四川省精品课程
金融学基础
 考核方式
期末考试（65%）
一页纸开卷
期中考试（15%）
一页纸开卷
UESTC
平时成绩（20%）

课堂表现

习题完成及答疑情况

小组作业情况

课程讲座表现

出勤表现
4
 教材与作者
四川省精品课程
金融学基础
UESTC
Zvi Bodie
5
Robert C. Merton
Finance
School of Management
Chapter 1:
What is Finance?
Objective
• To Define Finance
• The Value of Finance
• Introduction to
the Players
6
School of Management
Finance
Chapter 1 Contents
Defining Finance
 Why Study Finance
 Household Finance
 Financial Decisions-Firms
 Forms of Business
Organization
 Separation of Ownership
and Management




The Goal of management
Market DisciplineTakeovers
Role of the Financial
Specialists in a
Corporation
7
School of Management
Finance
Defining Finance
 What
do you know about ‘Finance’?
?
8
School of Management
Finance
Defining Finance
Finance, as a scientific discipline, is the study
of how to allocate scarce resources over time un
der conditions of uncertainty.
Future
Present
Future
9
School of Management
Finance
Analytical “Pillars” to Finance
 Optimization
over time
 Asset valuation
 Risk management
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School of Management
Finance
Finance Theory
 consists
of
– a set of concepts that help to organize one’s
thinking about how to allocate resources over
time,
– a set of quantitative models to help one evaluate
alternatives, make decisions, and implement
them.
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School of Management
Finance
Financial System
 The
financial system is defined as the set of
markets and other institutions used for
financial contracting and the exchange of
assets and risks.
 The ultimate function of the system is to
satisfy people’s consumption preferences.
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Finance
School of Management
Why Study Finance?
13
Finance
School of Management
Why Study Finance?
14
Finance
School of Management
Why Study Finance?
15
Finance
School of Management
Why Study Finance?
To manage your personal resources
 To deal with the world of business
 To pursue interesting and rewarding career
opportunities
 To make informed public choices as a citizen
 To expand your mind

16
School of Management
Finance
Harry M. Markowitz (1927~)
Awarded to the 1990
Nobel Prize
 Main Contribution:

– The father of modern
portfolio theory
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School of Management
Finance
William F. Sharpe (1934~)
Awarded to the 1990
Nobel Prize
 Main Contribution:

– Developing the Capital
Asset Pricing Model
(CAPM) theory
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School of Management
Finance
Merton H. Miller (1923~2000)
Awarded to the 1990
Nobel Prize
 Main Contribution:

– The M&M
(Modigliani-Miller)
Theorem
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School of Management
Finance
Robert C. Merton (1944~)
Awarded to the 1997
Nobel Prize
 Main Contribution:

– The pricing of options
and other derivatives
20
School of Management
Finance
Myron S. Scholes (1941~)
Awarded to the 1997
Nobel Prize
 Main Contribution:

– The pricing of options
and other derivatives
21
School of Management
Finance
Financial Decisions of Households
 Consumption
and saving decisions
 Investment decisions
 Financing decisions
 Risk-management decisions
22
School of Management
Finance
Important Terms
 Assets
 Personal
investing & Asset allocation
 Liability, Debt
 Net Worth = Assets – Liabilities
 Consumption preferences, exogenous
and endogenous elements
23
Finance
School of Management
Financial Decisions of Firms

Strategic planning & Capital budget decisions
– What businesses to be in
– Identifying ideas for new investment projects
– Evaluating the projects, and deciding which ones to
undertake
– Implementing them, a plan for acquiring assets and
for training the personnel
24
School of Management
Finance
Financial Decisions of Firms

Financing (Capital structure) decision
–
–
–
–

A feasible financing plan
The decisions about how much debt and equity to have
Wide range of financial instruments and claims
A corporation’s capital structure determines who gets
what shares of its cash flows, and partially determines
who gets to control the company.
Working capital management decision
– The day-to-day prosaic financial affairs of the business.
25
School of Management
Finance
Financial Decisions of Firms

Dividend decision
– How much cash to distribute to shareholders

Risk-management Decision
– How and on what terms should the firm seek to
reduce the financial uncertainties it faces?
26
School of Management
Finance
Forms of Business Organization

A sole proprietorship（个体业主制）
– unlimited liability

A partnership （合伙制）
– unlimited liability
– general partner & limited partner

A corporation（现代公司制）
– a legal entity distinct from its owners
– ownership, board of directors and limited liability
– public corporations & private corporations
27
School of Management
Finance
Quick Check

Is a corporation owned by a single person a
sole proprietorship? Why?

In a corporation the liability of the single
shareholder would be limited to the assets of
the corporation.
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School of Management
Finance
Separation of Ownership and Management
 The
owners of a firm delegate the
responsibility of running the business to
professional managers who may not own
any shares.
Why?
What?
How?
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Finance
School of Management
Reasons for Separation of Ownership and
Management





The owner need not have both the talents of a manager
and the financial resources.
The need to pool resources to achieve an efficient scale
of production.
The need of owners to diversify their risk in an
uncertain economic environment.
Allowing for savings in the costs of information
gathering.
The “learning curve” or “going concern” effect favors
the separated structure.
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Finance
School of Management
Separation of Ownership and Management
 The
corporate form is especially well
suited to the separation of owners and
managers because it allows relatively
frequent changes in owners by share
transfer without affecting the operations
of the firm.
31
School of Management
Finance
Conflicts of Interest
The separated structure creates the potential for a
conflict of interest between the owners and the
managers.
 An agency problem exists where the principal has
to entrust their interests to an agent who acts on
their behalf.
 Contractual arrangements, incentive schemes, and
monitoring are used to control principal‒agency
conflicts.
 The social cost for resolving the conflict.

32
Finance
School of Management
The Goal of Management
 The
difficulties of the goal of corporate
management to serve the best interests of
the shareholders.
 To be feasible and effective, the right rule
for the goal of management should be
independent of who the owners are.
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School of Management
Finance
Shareholder-Wealth-Maximization Rule
An illustration: the decision between a risky
investment and a safe one
 The role of well-functioning capital markets
 The rule depends only upon

–
–
–
–

the firm’s production technology
market interest rates
market risk premiums
security prices
The rule does not depend upon the risk aversion
or wealth of the owners.
34
School of Management
Finance
Ambiguities of Profit-Maximization Rule
Multi-periodic profits
 Uncertain future revenues or expenses
 An illustration

– Each of project A, B, and C require an initial outlay of
$1 million.
– Project A will return $1.05 million one year from now
and then over.
– Project B will last for two years, return nothing in the
first year, and then $1.1 million two years from now.
– Project C will either pay $1.2 million or $0.9 million
one year from now and then over.
35
Finance
School of Management
A Well-Functioning Stock Market
Implementation of the management goal and
market-price information
 The existence of an efficient stock market allows
the manager to substitute one set of external
information which is relatively easy to obtain‒
namely stock prices‒for another set which is
virtually impossible to obtain‒information about
the shareholders’ wealth, preferences, and other
investment opportunities.

36
Finance
School of Management
Market Discipline: Takeovers
The value of voting rights as a means of enforcement
 The mechanism of takeover（接管） for aligning the
incentives of managers with those of shareholders

– The threat of a takeover and the subsequent
replacement of management provides a strong incentive
for current managers (acting in their self-interest) to act
in the interests of the firm’s current shareholders by
maximizing market value.
37
School of Management
Finance
The Roles of Corporate Financial
Specialists

Financial executive‒a person with authority in the
following functions:
Board of Directors
Chief Executive Officer
VP Operations
Chief Financial Officer
VP Marketing
Treasurer
VP Financial Planning
Controller
38
School of Management
Finance
Role of the Financial Manager
(1)
Firm's
operations
Financial
manager
Financial
markets
(1) Cash raised from investors
39
School of Management
Finance
Role of the Financial Manager
(2)
Firm's
operations
(1)
Financial
manager
Financial
markets
(1) Cash raised from investors
(2) Cash invested in firm
40
School of Management
Finance
Role of the Financial Manager
(2)
(1)
Financial
manager
Firm's
operations
Financial
markets
(3)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
41
School of Management
Finance
Role of the Financial Manager
(2)
(1)
Financial
manager
Firm's
operations
Financial
markets
(4a)
(3)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
42
School of Management
Finance
Role of the Financial Manager
(2)
(1)
Financial
manager
Firm's
operations
Financial
markets
(4a)
(4b)
(3)
(5)
(1) Cash raised from investors
(2) Cash invested in firm
Tax paid to
Government
(5) Tax leakage
(3) Cash generated by operations
(4a) Cash reinvested (4b) Cash returned to investors
43
School of Management
Finance
Financial Functions in a Corporation









Planning
Provision of Capital
Administration of Funds
Accounting and Control
Protection of Assets
Tax Administration
Investor Relations
Evaluation and Consulting
Management Information Systems
44
School of Management
Finance
Assignments
 1,
3, 4, 6, 7
 Team Work: 8
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