Financial Management Overview and Markets

Financial Management Overview

• Finance's Role: Managing money effectively.
• Importance: Helps individuals and businesses make sound financial choices.
• Primary Goal: Increase the value of a company's stock for its owners.
• Business Structures:
  • Sole Proprietorship: Single owner.
  • Partnership: Multiple owners.
  • Corporation: Separate legal entity with multiple owners.
• Financial Manager's Duties:
  • Making key investment and financing decisions.
• Key Concepts:
  • Investing: Using funds to create future gains.
  • Financing: Obtaining funds to support operations.
  • Working Capital: Funds for daily operating expenses.

Financial Markets and Institutions

• Financial Markets: Platforms for buying and selling funds and assets (like stocks and bonds).
• Market Types:
  • Primary Market: Initial sale of new bonds or stock.
  • Secondary Market: Existing securities are exchanged.
• Financial Institutions: Companies facilitating financial transactions.
  • Examples: Banks, credit unions, insurance companies.
• Capital Allocation: Transferring funds from savers to borrowers, crucial for economic growth.
• Financial Instruments: Tools used in financial markets, like stocks and bonds.
• Market Participants: Individuals, institutions, and governments involved in markets.
• Market Importance: Establishes prices, provides liquidity (ease of buying/selling).
• Regulation: Government oversight to protect investors and maintain fair practices.

Financial Statements and Cash Flow

• Financial Statements: Reports summarizing a company's financial performance.

1. Balance Sheet:

   • Snapshot: Company's financial position at a specific time.
   • Shows assets (what the company owns), liabilities (what the company owes), and equity (owners' stake).
   • Categorizes items as current (short-term) or long-term.

2. Income Statement:

   • Period Result: Company's financial performance over a period (e.g., a quarter or year).
   • Reports revenue, expenses, and net income (profit or loss).

3. Cash Flow Statement:

   • Cash Movement: Tracks cash inflows and outflows during a period.
   • Separates activities into operating, investing, and financing categories.

• Cash Flow Significance: Shows if a company has enough cash to meet its obligations, vital for ongoing operations.

Time Value of Money

• Concept: Money available now is worth more than the same amount in the future due to potential earning capacity.
• Present Value (PV): Current worth of a future sum.
• Future Value (FV): Value of an amount today at a future date, factoring in interest.
• Calculating PV and FV: Formulas exist to determine these values.
• Interest Rate: Percentage reflecting the growth potential of money over time.
• Compounding: Interest earned on both principal and accumulated interest.
• Discounting: Determining the present value of a future sum.

Valuation of Bonds and Stocks

• Bonds: Loans to companies or governments, paying interest.
• Key Features: Face value, coupon rate, maturity date.
• Stock Valuation: Determining the worth of stock shares.
• Methods:
  • Dividend Discount Model: Values stocks based on predicted dividend payments.
  • Price-Earnings (P/E) Ratio: Compares stock price to company earnings.
• Factors Affecting Valuation: Interest rates, company performance, market conditions.

Risk and Return

• Risk: Chance of losing money on an investment.
• Return: Gains earned from an investment.
• Relationship: Higher risk often correlates with higher potential return.
• Types of Risk:
  • Systematic: Affects the entire market (e.g., economic downturn).
  • Unsystematic: Affects specific companies or industries.
• Measuring Risk:
  • Standard Deviation: Measures investment return variability.
• Capital Asset Pricing Model (CAPM): Formula estimating expected return based on risk.
• Importance: Understanding risk/return trade-offs for better investment decisions.