Foundations of Finance 310
Ohio University
College of Business
How do we learn?
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There are primarily seven ways
5%
What do you think of when
someone says “finance”?
Why is finance important personally?
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Food, clothing, shelter
Taxes can take 40% of what we earn
Marriage issues – $ often cause of divorce
Knowledge of managing money (star athletes)
Retirement
Marriage and Money
Marriage and Money
Finance: The Art and Science of
Managing Money
Financial Management
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Financial Management or business finance is
concerned with managing an entity’s money.
For example, a company must decide:
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where to invest its money.
whether or not to replace an old asset.
when to issue new stocks and bonds.
whether or not to pay dividends.
Finance Utilizes
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Economics
Accounting
Financial analysis is like a…
What do you see?
What do you see?
What do you see?
Count every “F” below?
FINISHED FILES ARE THE RE
SULT OF YEARS OF SCIENTI
FIC STUDY COMBINED WITH
THE EXPERIENCE OF YEARS...
What number goes in the triangle?
Organizations that hire
Finance Grads
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Banks
Insurance Companies
Any Large Business
Investment Bankers
Stockbrokers
OU Finance Grads
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Most job offers – banking
Average salary - $45,200
53% were employed in finance field
Source: 2007 commencement survey
CHAPTER 1
An Overview of
Financial Management
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Forms of Businesses
Goals of the Corporation
Firm Valuation
Social Responsibility and Finance
Sole proprietorships & Partnerships
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Advantages
Ease of formation
 Subject to few regulations
 No corporate income taxes
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Disadvantages
Difficult to raise capital
 Unlimited liability
 Limited life
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Corporation
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Advantages
Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
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Disadvantages
Double taxation
 Cost of set-up and report filing
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Financial Goals of the Corporation
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The primary financial goal is shareholder
wealth maximization, which translates to
maximizing stock price.
Do firms have any responsibilities to society at
large?
 Is stock price maximization good or bad for
society?
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Is stock price maximization the same
as profit maximization?
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No, despite a generally high correlation
amongst stock price, EPS, and cash flow.
Current stock price relies upon current
earnings, as well as future earnings and cash
flow.
The goal of the financial manager is
to maximize the value of the firm.
What determines a firm’s value?
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A firm’s value is the sum of all the future
expected free cash flows when converted into
today’s dollars (present value)
Market Capitalizations
Billions
AMAZON.COM
$ 415
BEST BUY
220
EXXON MOBIL
181
GEN MOTORS
23
MICROSOFT
12
STARBUCKS
7
WAL MART
3
Market Capitalizations
Billions
EXXON MOBIL
$ 415
WALMART
220
MICROSOFT
181
AMAZON.com
23
BEST BUY
12
STARBUCKS
7
GEN MOTORS
3
Factors that affect stock price
Factors that affect stock price
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Projected size of cash
flows to shareholders
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Timing of the cash
flow stream
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Riskiness of the cash
flows
What is Ethical Behavior?
 Behavior
that conforms to accepted
professional standards of conduct.
Ethical Dilemmas
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Norfolk’s trains are polluting the air along their
routes, but the pollution is within legal limits
and preventative actions would be costly. Are
the managers ethically bound to reduce
pollution?
What facts are unknown?
 What individuals and groups have an
important stake in the outcome?
 What are the options for acting?
 Which option is fair to all stakeholders?
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There's No Such Thing As
"Business" Ethics : There's Only
One Rule for Making Decisions
Sarbanes-Oxley Act of 2002
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Set up a Board with responsibility for:
Auditing standards within companies
 Controlling the quality of audits
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Major focus is to make sure that publicly-traded
corporations accurately present their financial
statements.
Longer jail sentences
Made CEOs responsible for the fin. stmts.
Stocks versus Bonds
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Stock = ownership or equity
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Stockholders own the company
Bond = debt or IOU
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Bondholders are owed $ by company