Class #2 on 21/01
Topic: financial markets
Although sloppy at times, slightly irrational, disruptive and
complicated, the global financial system, on average, works well
Markets are heavily regulated (more so since the financial crisis in
2008) in developed counties
The flow of funds is imperative for the financial markets to work
correctly. Simply: take money from savers and lend to those who
need
The financial environment has three primary areas
oMarkets and institutions: organizations or intermediaries that
help the financial system operate efficiently and transfer
funds from savers and investors to individuals, businesses and
governments that seek to spend or invest the funds in
physical or financial assets.
oInvestments: involves the sale of marketing of securities, the
analysis of securities and the management risk through
portfolio diversification
oFinancial management: involves the planning, asset
management and fund-raising decisions
Why is it important to study finance?
oTo make informed economic decision; all metrics in some
capacity influence the marketplace. Do we want expansive
government, higher taxes, high deficits, free trade, low
inflation, etc. how these policy decisions affect us as investors
and consumers is central to investing
oTo make informed personal and business investment decision:
how do we maximise returns? How do we beat inflation? How
do we save for retirement? How do we decide what projects as
a company to take on?
To make informed career decisions based on a basic understanding
of business finance
oThe opportunity cost of getting an MBA is an example; what is
the return monetarily? What is the long-term impact on my
career? Is there a psychological benefit to getting an
advanced degree
oNetworking: how to interact with others regarding money and
investments. Stocks and real estate investing have a social
aspect to them. Having a solid understanding of investments
assists you in conversing with others
Corporate finance:
oThe primary purpose of corporate finance is to create value. In
general, the primary goal is to maximise the share price
oAs a financial manager, leader, owner, etc.: you want to make
decisions that will create value, in particular long-term value,
for the company
oHowever, there are many interested parties involved in any
corporation
Hypothetical stakeholder conflicts
oExample 1: FORD decides it wants to build a new plant to
make cars. The cost of building this plant will be dramatically
cheaper and their personnel costs will be substantially less if
built in Mexico. Shareholders would like this to move forward,
employees/unions/the community would not. Question: as a
consumer, would you be willing to pay more for a product
made in the US as opposed to one built overseas?
oExample 2: Apple builds the vast majority of their products
overseas, many through a company called Foxconn, a
Taiwanese based company with extensive operations in Taiwan
and China. Average pay for a manufacturing worker at
Foxconn in China is about 400 per month. As an American
consumer, will this influence your decision to buy an apple
product?
It’s always about cash flows
oCash flows: The movement of money in and out of a
company. Cash received signifies flows, and cash spent
signifies outflows. The cash flow statement is a financial
statement that reports on a company’s sources and usage of
cash over some time. A company’s cash flow is typically
categorized as cash flows from operations, investing, and
financing
Productive Assets: long-term assets. These types of assets
include tangible assets. Examples: equipment, machinery etc. they
can also include intangible assets such as patents, trademarks,
technical know-how, etc. One goal of the financial manager is to
select assets that will generate the greatest cash flows for the
owners of the company
Capital budgeting: decision-making process through that financial
managers make regarding productive assets to acquire. It is the
process a business undertakes to evaluate potential major projects
or investments.
Following the decision of which assets a firm will acquire; they must
decide on how to pay for them. This is called the financing decision.
There are generally two basic ways for the firm to pay for these
productive assets:
oEquity: issuance of stock, stockholders OWN the company
oDebt: issuance of bonds, bondholders are creditors of the
company
One area which is vitally important for financial managers regarding
working capital management is costs
It is important that the manager keeps raw materials, labour,
management and administrative costs to a minimum
It is also important to note that the manager also must balance
quality aspect of the firms’ products so that clients and consumers
still believe they are getting value for their money
