FUNDAMENTALS OF BUSINESS FINANCE
F U N D A M E N T A L S O F B U S I N E S S F I N A N C E Lecture 1: Introduction to Fundamentals of Business Finance Four Basic Areas of Finance: Æ Æ Æ Æ
Corporate Investments Financial institutions International Finance
Financial Managers Role: Responsible for accounting and treasury activities and makes decisions that ensures the financial success of a business! MAXIMISATION OF SHARE PRICE/DIVIDENDS Wealth is measured in terms of cash flow NOT accounting profit!
Financial Managers Responsibilities: Investment decisions, Financing decisions and Working capital decisions!
Factors in any Financial Decision: Æ Cash amount Æ Timing Æ Risk
Corporate Governance: Must be set up in order for company to run! Management only makes optimal decisions if ADEQUATELY COMPENSATED. Owners give incentives in order to control management’s actions.
Principal and Agent Law: Agency law is part of commercial law! = Contractual relationship between a person (the agent) who is authorised to act on behalf of another (the principal).
Financial Markets: Facilitates transactions in financial securities. Exist to efficiently allocate funds for alternative uses. Æ Primary Market – security of instrument issued to an investor for the first time. RAISING FUNDS! Æ Secondary Market – financial securities that are already issued are bought and sold. TRADING!
Investment + Financing Decisions: The Investment decision is more important – determines the real assets that a firm acquires à determines cash flows the firm generates. Æ Investment Decision – determines the composition of ASSETS controlled by the firm. Æ Financing Decision – concerned with DEBT (liabilities) and owner’s EQUITY.
Lecture 2: Time Value of Money 1 The financial manager makes decisions about proposals with cash flows over long periods of time. TVM = dollar today is worth more than a dollar tomorrow.
Annual Percentage Rate (APR/Nominal rate): The APR is a rate compounded more frequently than annually, e.g. daily, monthly or half-‐yearly.
Effective Rate (EFF/EAR): A rate compounded ANUALLY!
Simple Interest Used in the valuation of SHORT-‐TERM financial instruments e.g. bills (term under 12 months)! Calculated on the original principal: 𝐹𝑉 = 𝑃𝑉(1 + 𝑖 × 𝑛)
Compound Interest Calculated with PV + i becoming the new principal 𝐹𝑉 = 𝑃𝑉 1 + 𝑖 ! 𝑃𝑉 = 𝐹𝑉 1 + 𝑖 !!
Effective Annual Rates Converts non-‐annual rates compounding at non-‐annual periods into an annual rate compounding at annual periods: 𝐸𝐴𝑅 = 1 + 𝑖 ! − 1 Æ High I.R. = High FV Wilma borrows $250,000 for 150 days. How much interest will she have to pay if Æ High I.R. = Low PV the interest rate is 8% compounding DAILY? 𝐹𝑉 = 𝑃𝑉(1 + 𝑖)! 0.08 !"# 𝐹𝑉 = 250,000 × (1 + ) 365 = $258, 354.85 Æ 𝐼𝑁𝑇 = 𝐹𝑉 − 𝑃𝑉 = 258,354.85 − 250,000 = $𝟖, 𝟑𝟓𝟒. 𝟖𝟓 Æ
You Invested $17,000 in a superannuation fund in 2006. If you withdrew $18,000 from the fund in 2011, how much will be in the fund in 2015? Assume the fund earns a constant return of 7.6%pa. Æ Find the value of $17,000 investment in 2011 (5yrs from now): n FV = PV(1 + i) 5 = 17000(1.076) = $24,519.42 Æ Determine balance in 2011: 24,519.42 – 18,000 = $6,519.42 Æ Find accumulated value in 2015 (4 years from 2011): n FV = PV(1 + i) 4 = 6,519.42(1.076) = $8,738.93
Corporate Investments Financial institutions International Finance
Financial Managers Role: Responsible for accounting and treasury activities and makes decisions that ensures the financial success of a business! MAXIMISATION OF SHARE PRICE/DIVIDENDS Wealth is measured in terms of cash flow NOT accounting profit!
Financial Managers Responsibilities: Investment decisions, Financing decisions and Working capital decisions!
Factors in any Financial Decision: Æ Cash amount Æ Timing Æ Risk
Corporate Governance: Must be set up in order for company to run! Management only makes optimal decisions if ADEQUATELY COMPENSATED. Owners give incentives in order to control management’s actions.
Principal and Agent Law: Agency law is part of commercial law! = Contractual relationship between a person (the agent) who is authorised to act on behalf of another (the principal).
Financial Markets: Facilitates transactions in financial securities. Exist to efficiently allocate funds for alternative uses. Æ Primary Market – security of instrument issued to an investor for the first time. RAISING FUNDS! Æ Secondary Market – financial securities that are already issued are bought and sold. TRADING!
Investment + Financing Decisions: The Investment decision is more important – determines the real assets that a firm acquires à determines cash flows the firm generates. Æ Investment Decision – determines the composition of ASSETS controlled by the firm. Æ Financing Decision – concerned with DEBT (liabilities) and owner’s EQUITY.
Lecture 2: Time Value of Money 1 The financial manager makes decisions about proposals with cash flows over long periods of time. TVM = dollar today is worth more than a dollar tomorrow.
Annual Percentage Rate (APR/Nominal rate): The APR is a rate compounded more frequently than annually, e.g. daily, monthly or half-‐yearly.
Effective Rate (EFF/EAR): A rate compounded ANUALLY!
Simple Interest Used in the valuation of SHORT-‐TERM financial instruments e.g. bills (term under 12 months)! Calculated on the original principal: 𝐹𝑉 = 𝑃𝑉(1 + 𝑖 × 𝑛)
Compound Interest Calculated with PV + i becoming the new principal 𝐹𝑉 = 𝑃𝑉 1 + 𝑖 ! 𝑃𝑉 = 𝐹𝑉 1 + 𝑖 !!
Effective Annual Rates Converts non-‐annual rates compounding at non-‐annual periods into an annual rate compounding at annual periods: 𝐸𝐴𝑅 = 1 + 𝑖 ! − 1 Æ High I.R. = High FV Wilma borrows $250,000 for 150 days. How much interest will she have to pay if Æ High I.R. = Low PV the interest rate is 8% compounding DAILY? 𝐹𝑉 = 𝑃𝑉(1 + 𝑖)! 0.08 !"# 𝐹𝑉 = 250,000 × (1 + ) 365 = $258, 354.85 Æ 𝐼𝑁𝑇 = 𝐹𝑉 − 𝑃𝑉 = 258,354.85 − 250,000 = $𝟖, 𝟑𝟓𝟒. 𝟖𝟓 Æ
You Invested $17,000 in a superannuation fund in 2006. If you withdrew $18,000 from the fund in 2011, how much will be in the fund in 2015? Assume the fund earns a constant return of 7.6%pa. Æ Find the value of $17,000 investment in 2011 (5yrs from now): n FV = PV(1 + i) 5 = 17000(1.076) = $24,519.42 Æ Determine balance in 2011: 24,519.42 – 18,000 = $6,519.42 Æ Find accumulated value in 2015 (4 years from 2011): n FV = PV(1 + i) 4 = 6,519.42(1.076) = $8,738.93
