Introduction To Business Finance FINA 320 PDF

Introduction To Business Finance FINA 320 Dr. Lei Zhou  Learning Objectives Distinguish the major areas of finance Delineate the different forms of business organization and their pros and cons Identify the main goal of financial management Describe the...

Introduction To Business Finance FINA 320 Dr. Lei Zhou  Learning Objectives Distinguish the major areas of finance Delineate the different forms of business organization and their pros and cons Identify the main goal of financial management Describe the conflicts of interest that can arise between owners and managers NIU FINA 320 - Dr. Lei Zhou 2  Major Areas in Finance Investment – Financial Assets Valuation – Investment Risk and Return Corporate Finance – Capital Budgeting – Cost of Capital – Working Capital Management Capital Markets and Financial Institutions – Financial Intermediaries NIU FINA 320 - Dr. Lei Zhou 3  Investment Why do we invest? – For future consumption – To increase wealth What do we invest in? – Physical assets – Financial assets How do we invest? – Trade-off between risk and returns – Portfolio management NIU FINA 320 - Dr. Lei Zhou 4  Corporate Finance Capital budgeting – What long-term investments or projects should the business take on? Cost of capital – How expensive are our capitals? – Should we use debt or equity? Working capital management – How do we manage the day-to-day finances of the firm? NIU FINA 320 - Dr. Lei Zhou 5  Financial Markets Financial Markets – Intermediaries between investors and companies – Banks, stock exchanges, etc. Primary vs. secondary markets – Primary market is where companies raise funds – Secondary market is where investors trade their financial assets – Why do we need secondary market? NIU FINA 320 - Dr. Lei Zhou 6  Forms of Business Organization Three major forms in the United States – Sole proprietorship – Partnership General Limited – Corporation NIU FINA 320 - Dr. Lei Zhou 7  Sole Proprietorship Advantages Disadvantages – Easiest to start – Limited to life of owner – Least regulated – Limited equity capital – Single owner keeps all – Unlimited liability the profits – Difficult to sell – Taxed once as ownership interest personal income NIU FINA 320 - Dr. Lei Zhou 8  Partnership Advantages Disadvantages – Two or more owners – Unlimited liability – More capital available General partnership – Limited partnership Relatively easy to start – – Partnership dissolves Income taxed once as personal income when one partner dies or wishes to sell – Difficult to transfer ownership NIU FINA 320 - Dr. Lei Zhou 9  Corporation Advantages Disadvantages – Limited liability – Separation of – Unlimited life ownership and – Separation of management ownership and – Double taxation management (income taxed at the – Transfer of ownership corporate rate and then is easy dividends taxed at – Easier to raise capital personal rate) NIU FINA 320 - Dr. Lei Zhou 10  Financial Manager The top financial manager within a firm is usually the Chief Financial Officer (CFO) – Treasurer – oversees cash management, credit management, capital expenditures and financial planning – Controller – oversees taxes, cost accounting, financial accounting and data processing NIU FINA 320 - Dr. Lei Zhou 11  Goal Of Financial Management What should be the goal of a corporation? – Maximize profit? – Minimize costs? – Maximize market share? – Maximize the current value of the company’s stock? Does this mean we should do anything and everything to maximize owner wealth? NIU FINA 320 - Dr. Lei Zhou 12  The Agency Problem Agency relationship – Principal hires an agent to represent their interest – Stockholders (principals) hire managers (agents) to run the company Agency problem – Conflict of interest between principal and agent Management goals and agency costs NIU FINA 320 - Dr. Lei Zhou 13  Managing Managers Managerial compensation – Incentives can be used to align management and stockholder interests – The incentives need to be structured carefully to make sure that they achieve their goal Corporate control – The threat of a takeover may result in better management Other stakeholders NIU FINA 320 - Dr. Lei Zhou 14