Business Finance Overview

Business Finance Overview

• Business finance is the management of money and investments for a business
• Involves financial planning, budgeting, and forecasting
• Key objective: maximize shareholder value

Financial Statements

• Balance Sheet: snapshot of a company's financial position at a specific point in time
  • Assets, liabilities, equity
• Income Statement: summary of revenues and expenses over a specific period
  • Revenues, cost of goods sold, operating expenses, net income
• Cash Flow Statement: summary of cash inflows and outflows over a specific period
  • Operating, investing, financing activities

Time Value of Money

• Present Value: current value of future cash flows
  • Formula: PV = FV / (1 + r)^n
• Future Value: future value of current cash flows
  • Formula: FV = PV x (1 + r)^n
• Net Present Value: sum of present values of cash inflows and outflows
  • NPV > 0: investment is profitable; NPV < 0: investment is unprofitable

Risk and Return

• Risk: uncertainty of an investment's return
• Return: profit or loss on an investment
• Risk-Return Tradeoff: higher potential returns often come with higher risk
• Diversification: spreading investments to reduce risk

Capital Budgeting

• Capital Budgeting: process of evaluating and selecting investments
• NPV Rule: accept investments with NPV > 0
• IRR Rule: accept investments with IRR > cost of capital
• Payback Period: time it takes for an investment to generate cash flows equal to its cost

Cost of Capital

• Weighted Average Cost of Capital (WACC): weighted average of debt and equity costs
  • WACC = (E/V x Re) + (D/V x Rd x (1 - T))
• Cost of Debt: cost of borrowing money
• Cost of Equity: cost of raising capital through equity issuance

Business Finance Overview

• Business finance involves managing money and investments to maximize shareholder value
• Key activities include financial planning, budgeting, and forecasting

Financial Statements

• Balance Sheet: provides a snapshot of a company's financial position at a specific point in time
  • Composed of assets, liabilities, and equity
• Income Statement: summarizes revenues and expenses over a specific period
  • Breaks down into revenues, cost of goods sold, operating expenses, and net income
• Cash Flow Statement: summarizes cash inflows and outflows over a specific period
  • Divided into operating, investing, and financing activities

Time Value of Money

• Present Value: current value of future cash flows
  • Calculated using the formula PV = FV / (1 + r)^n
• Future Value: future value of current cash flows
  • Calculated using the formula FV = PV x (1 + r)^n
• Net Present Value: sum of present values of cash inflows and outflows
  • Indicates investment profitability if NPV > 0, and unprofitability if NPV < 0

Risk and Return

• Risk: uncertainty of an investment's return
• Return: profit or loss on an investment
• Risk-Return Tradeoff: higher potential returns often come with higher risk
• Diversification: spreading investments to reduce risk

Capital Budgeting

• Capital Budgeting: process of evaluating and selecting investments
• NPV Rule: accept investments with NPV > 0
• IRR Rule: accept investments with IRR > cost of capital
• Payback Period: time it takes for an investment to generate cash flows equal to its cost

Cost of Capital

• Weighted Average Cost of Capital (WACC): weighted average of debt and equity costs
  • Calculated using the formula WACC = (E/V x Re) + (D/V x Rd x (1 - T))
• Cost of Debt: cost of borrowing money
• Cost of Equity: cost of raising capital through equity issuance