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An introduction to the principles of finance, focusing on the role of finance in personal and professional lives, different business organizational forms, and the goal of the financial manager. It also covers the four basic principles of finance: time value of money, risk-return tradeoff, cash flows as the source of value, and market prices reflecting information.
What you will learn
Typology: Exercises
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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
Finance is the study of how people and businesses evaluate investments and raise capital to fund them.
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.
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?
1.4 THE FOUR BASIC1.4 THE FOUR BASIC PRINCIPLES OF FINANCEPRINCIPLES OF FINANCE
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.
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.
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.
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.