Introduction to Financial
Management
Administrative Issues and
Course Overview
FIn 351: Lecture 1
Today’s plan
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administrative issues
• syllabus
• prerequisite
• add, drop and withdraw
• Middle-term and final exams
• final grade
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course overview
The functions of the financial market
The cost of capital
FIn 351: Lecture 1
The instructor
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My name is George Li
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Call me George, not professor
Office: BUS 315
Office hours:
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17:15 to 18:15 MW
Website: http://online.sfsu.edu/~li123456
Research interest:
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Corporate finance: real options, technological innovations, and
valuations
Asset pricing: information and stock prices
FIn 351: Lecture 1
Why do you want to take this
course
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First, what ‘s your objective or why are
you taking Fin 351?
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nothing better to do today ?
become a millionaire overnight?
the instructor is a nice guy for a good grade?
get a “stamp of approval” to get a job ?
learn finance for fun ?
simply a required course ?
learn finance to be more successful?
FIn 351: Lecture 1
My objectives in this course
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My objectives
• i want you to understand the concepts / issues better
• i want you to feel comfortable talking about finance and
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answering finance questions.
i want you to gain a set of tools and concepts that will help
you look at the world in a slightly different way.
What is standing in the way of those
objectives?
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Over-confidence
Under-confidence
FIn 351: Lecture 1
Two ways of learning
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Positive
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Can be a fun, since it is an opportunity to improve your
future career, open your mind and broaden your vision
Look at each difficulty as an opportunity to learn new
things
Good performance
Negative
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Can be boring, since it is regarded as a burden, a task
Look at each difficulty as a “torture” or pain
Bad performance
FIn 351: Lecture 1
Textbook
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fundamentals of corporate finance, by
Brealey, Myers and Marcas (6th edition)
sorry about the cost
this is a standard textbook used in many
major schools for the first course in corporate
finance
FIn 351: Lecture 1
Prerequisite
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You are required to take Fin 350 with a
grade of at least C-.
It is the school’s policy that all the
students in this course must satisfy this
requirement and there is no exception
FIn 351: Lecture 1
Add, drop and withdrawal policy
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The business school has the policy for
add, drop and withdrawal
• Students can withdraw once
• Please read the bulletin for detail information
about the withdrawal and adding to this
course.
FIn 351: Lecture 1
Homework and cases
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To help you understand the concepts taught in class,
and prepare the mid-term and the final exams, there
is a homework set assigned for each covered
chapter, which is not graded, but its solution will be
posted in my website. The best way to learn is to do
a lot of problems, think a lot and try to apply what
you have learned to real world problems.
In addition, I will discuss two or three cases in
lectures to apply the concepts you have learned in
this course to solve problems in the real financial
world. These cases will also help you to get better
prepared for the final.
FIn 351: Lecture 1
The mid-term and the final exam
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The mid-term and final exams will be in
class (closed book), with a form of
multiple choice questions.
There are no makeup or in-advance
exams.
The final exam is cumulative, based on
all the covered materials.
FIn 351: Lecture 1
Final grade
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Your overall course grade will be based
on your performance in the mid-term
and the final exams as follows:
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Class attendance
Mid-term exam:
final exam:
total
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5 pts
35 pts
60 pts
100 pts
FIn 351: Lecture 1
Grading policy
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Your grades are based on the
distribution of the scores of the class. If
you are at the top 10% of the class, you
will get a grade of at least A-.
The average grade for this class is
about B-, which is the average grade
for this course in the last two years.
FIn 351: Lecture 1
The curve of grades
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Ranking (from top to bottom)
0%-10%
10%-50%
50%-85%
85% - 95%
95%-100%
A
B
C
D
FIn 351: Lecture 1
Grade
Range ( A, A-)
Range (B+, B, B-)
Range (C+, C, C-)
Range (D+,D,D-)
F
Corporate finance: what is it?
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Corporate Finance
• A set of concepts, theories and approaches
that help the firm to make financial decisions
FIn 351: Lecture 1
Financial decisions
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Capital budgeting (use of the capital)
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Real investments
Mergers; acquisitions
Financing (capital structure decision)
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Equity
Debt
FIn 351: Lecture 1
FIN 351: course organization
FIN 351
Module 2
Module 3
Module 4
Fundamentals of valuation
Valuing risky investments
Risk and return
Corporate financial decisions
Market efficiency and options
Fundamentals of PV
Financial decision
Interest rates
Portfolio theory
Diversification and covariance
Types of securities
Stocks, bonds and other
Weak, semi-strong and
strong form efficiency
Information and stock prices
Perpetuities and
annuities calculation
Tangency portfolio, CAPM
risk and return
Modigliani-Miller theorem 1
Pizza size is independent of
how sliced
Options and Black-Scholes
Valuing stocks
and bonds
NPV and other criteria
Effect of leverage
WACC and discount rate
Modigliani-Miller theorem 2
WACC
Binomial model, replication
Risk-neutral probabilities
Module 1
FIn 351: Lecture 1
Course organization
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This course is broken-down into four
modules
Module 1: time value of money
Module 2: risk and return
Module 3: capital structure
Module 4: financial markets
FIn 351: Lecture 1
Time value of money
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This module is a “skill building” block in
this course
We will soon have the necessary skills
needed to value stocks and bonds
In this module, we don’t consider risk
explicitly:
• future cash flows forecasts are given
• discount rates are given
FIn 351: Lecture 1
Risk and return
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This part teaches us about uncertainty
How do we measure risk?
How much is one piece of risky cash
flow in the future worth (today)?
They are both:
• skill building sections
• conceptually more difficult sections
FIn 351: Lecture 1
Financing decisions
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If you are the CEO of an industrial
company
• you can make your company more valuable
•
by choosing “better” projects
we want to know if you (and the CFO) can
make your company more valuable by
changing the mixture of your financing (i.e.
the ratio of debt to equity)
FIn 351: Lecture 1
The efficiency of financial
markets and options
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We will look at how information gets into
security prices
We will learn three forms market
efficiency
We will examine the implication of
market efficiency on financing
We don’t have time to examine options
FIn 351: Lecture 1
Financial markets and investors
(2)
(1)
Investors
Firm's
operations
Financial
Manager
(4a)
Real assets
(timberland)
(4b)
(3)
(1) Investors buy shares with cash
(2)Cash is invested
(3) Operations generates cash
(4a) Cash reinvested
(4b) Cash returned to investors
FIn 351: Lecture 1
(stockholders
save and invest
in closely held
firm.)
Financial markets
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A financial market
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The classification of the financial market
• Securities are issued and traded
• By seasoning of claim
• Primary market
• Secondary market
• By nature of market
• Debt market
• Equity market
FIn 351: Lecture 1
Financial markets (continue)
• By maturity of claim
• Money market
• Capital market
FIn 351: Lecture 1
The functions of financial
markets
1.
2.
3.
4.
5.
6.
7.
Conducting exchange
Providing liquidity
Pooling money to fund large corporations
Transferring money across time and distance
Risk management (hedge, diversify)
Providing information
Providing efficient allocation of money
FIn 351: Lecture 1
Conducting exchange
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What does it mean ?
Examples
FIn 351: Lecture 1
Providing liquidity
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What does this mean?
Examples
FIn 351: Lecture 1
Pooling money to fund large
corporation investments
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What does this mean?
Examples
FIn 351: Lecture 1
Transferring money across time
and distance
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What does this mean?
Examples
FIn 351: Lecture 1
Risk management
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What does this mean?
Examples
FIn 351: Lecture 1
Providing information
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What does this mean?
Examples
FIn 351: Lecture 1
Providing efficient allocation of
money
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What does this mean?
Examples
FIn 351: Lecture 1
The cost of capital
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The cost of capital is a very important
concept in capital budgeting.
It links investment opportunities in
financial markets and investment
opportunities in real assets markets.
FIn 351: Lecture 1
What is the cost of capital?
Cash
Investment
opportunity (real
asset)
Firm
Invest
Shareholder
Alternative:
pay dividend
to shareholders
FIn 351: Lecture 1
Investment
opportunities
(financial assets)
Shareholders invest
for themselves