Download Principles of Finance: Understanding Business Organizations and Financial Management and more Exercises Finance in PDF only on Docsity!
Getting Started:Getting Started:
Principles of FinancePrinciples of Finance
Chapter 1
Principles of FinancePrinciples of Finance
Learning ObjectivesLearning Objectives
Introduction
1.Finance: An Overview 2.Three Types of Business Organizationsg 3.The Goal of the Financial Manager 4.The Four Basic Principles of Finance
Learning ObjectivesLearning Objectives
- Understand the importance of finance in your personal and professional lives and identify the three primary business decisions that financial managers make.
- Identify the key differences between three major legal forms of business.
Learning ObjectivesLearning Objectives
- Understand the role of the financial manager within the firm and the goal for making financial choices.
- Explain the four principles of finance that form the basis of financial management for both businesses and individuals.
1.1 FINANCE:1.1 FINANCE:
AN OVERVIEWAN OVERVIEW
What is Finance?What is Finance?
Finance is the study of how people and businesses evaluate investments and raise capital to fund them.
Business Organizational FormsBusiness Organizational Forms
Business Forms
Sole Proprietorships
Partnerships (^) Corporations Hybrids
How Does Finance Fit into the Firm’sHow Does Finance Fit into the Firm’s Organizational Structure?Organizational Structure?
In a corporation, the Chief Financial Officer (CFO) is responsible for managing the firm’s financial affairs.
1.3 THE GOAL OF THE1.3 THE GOAL OF THE
FINANCIAL MANAGERFINANCIAL MANAGER
The Goal of the Financial ManagerThe Goal of the Financial Manager
The goal of the financial manager must be consistent with the mission of the corporation.
What is the generally accepted missiong y p of a corporation?
- To maximize firm value shareholder’s wealth (as measured by share prices)
1.4 THE FOUR BASIC1.4 THE FOUR BASIC PRINCIPLES OF FINANCEPRINCIPLES OF FINANCE
PRINCIPLE 1:PRINCIPLE 1:
Money Has a Time Value.Money Has a Time Value.
A dollar received today is more valuable than a dollar received in the future. ◦ We can invest the dollar received today to earn interest. ◦ Thus, in the future, you will have more thanh h f ll h h one dollar, as you will receive the interest on your investment plus your initial invested dollar.
PRINCIPLE 2:PRINCIPLE 2:
There is a RiskThere is a Risk--Return TradeReturn Trade--off.off.
We only take risk when we expect to be compensated for the extra risk with additional return.
Higher the risk, higher will be the expected return.
PRINCIPLE 3:PRINCIPLE 3:
Cash Flows Are The Source of Value.Cash Flows Are The Source of Value.
Net income is an accounting concept designed to measure a business’s performance over an interval of time.
Cash flow is the amount of cash that can actually be taken out of the business over this same interval.
Profits versus CashProfits versus Cash
It is possible for a firm to report accounting profits but have no cash.
For example, if all sales are on credit,p , , the firm may report accounting profits even though no cash is being generated.
