BEC DOMS a ppt on what is finance

1. FINANCIAL MANAGEMENT Part 1: An introduction to financ What is finance?

12. THE FLOW OF FUNDS DIAGRAM Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) Funds Funds Financial Assets = Financial Claims

13. THE FLOW OF FUNDS DIAGRAM Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) Funds Funds Financial Assets = Financial Claims Borrower demander of loanable funds seller of securities Saver, lender buyer of financial assets financial investor supplier of loanable funds buyer of securities.

16. THE FLOW OF FUNDS DIAGRAM DIRECT FINANCING (Markets) Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) INDIRECT FINANCIAL INVESTMENT OR INTERMEDIATION FINANCING Brokers Dealers Intermediaries Funds Funds Funds Funds

17. THE FLOW OF FUNDS DIAGRAM DIRECT Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) INDIRECT Brokers Dealers Intermediaries Funds Funds Funds Funds Direct Financial Assets Purchase Indirect Financial Assets Purchase Direct Financial Assets Issue Direct Financial Assets Issue

28. FINANCIAL MANAGEMENT Part 1: An introduction to finance Lecture 1: What is finance? (II)

30. Lecture 1: What is finance? (II) 1.3. The Firm: a sistemic approach Subsistema de recursos humanos Subsistema de dirección y gestión Subsistema de dirección y gestión Subsistema comercial Subsistema de operaciones Dinero Dinero Personal Personal Bienes y servicios Personal Personal Goods and Services Resourses Expenses Sales Incomes Subsistema de recursos humanos Human Resources Subsystem Subsistema de dirección y gestión Management Subsystem Subsistema de dirección y gestión Finance Subsystem Commercial Subsystem Operations Subsystem Funds Funds Human resources Human resources Goods and Services Personnel Human Resources Resourses

31. Lecture 1: What is finance? (II) 1.4. The Firm: a sistemic approach FINANCIAL SUBSYTEM Planificación Financiera Planificación Financiera FINANCIACIÓN Financiación Externa Autofinanciación Beneficio INVERSIÓN Financiación en activo fijo Inversión en activo circulante Costes Subsistema de recursos humanos Subsistema de operaciones Subsistema comercial Subsistema de dirección y gestión Demanda de créditos Valores Mercados Financieros Dividendos Impuestos E N T O R N O Dinero Recursos Expenses Resources Amortización Reservas Planificación Financiera Planificación Financiera FINANCIACIÓN Financiación Externa Autofinanciación Beneficio INVERSIÓN Financiación en activo fijo Inversión en activo circulante Costes Subsistema de recursos humanos Subsistema de operaciones Subsistema comercial Subsistema de dirección y gestión Demanda de créditos Valores Mercados Financieros Dividendos Impuestos E N T O R N O Dinero Recursos In Amortización Reservas Planificación Financiera Financial Planning FINANCIACIÓN Financiación Externa Autofinanciación FINANCING External Financing Retained earnings Beneficio Benefit INVERSIÓN Financiación en activo fijo Inversión en activo circulante Costes INVERSIÓN Financiación en activo fijo Inversión en activo circulante INVESTMENT Fixed Asset Current Assets Costs Subsistema de recursos humanos Human Recourses Subsystem Subsistema de operaciones Operations Subsystem Subsistema comercial Commercial Subsystem Subsistema de dirección y gestión Management Subsytem Demanda de créditos Valores Mercados Financieros Dividendos Impuestos E N T O R N O Debt Securities Financial Market Dividends Taxes E N V I R O N M E N T Funds Resources Income Empoloyees Depreciation Reserves

32. Lecture 1: What is finance? (II) 1.5. Corporate Finance: the financial function Corporations face two broad financial questions: - What investments should the firm make? - How should it pay for those investments? Financial managers are concerned with : Investment Decisions (use of funds): The buying, holding or selling of types of assets Financing Decisions (acquisitions of funds)

33. Lecture 1: What is finance? (II) 1.6. Corporate Finance: the financial function FINANCIAL MANAGEMENT (CORPORATE FINANCE) r ( r > k ) k FINANCIAL SYSTEM REAL SYSTEM INVESTMENT FINANCING INVESTMENT / FINANCIAL SUBSYTEM RETURN REPAYMENT AND RETURN FINANCIAL MARKETS FIRM OPERATIONS ( Real goods & services

34. Lecture 1: What is finance? (II) 1.7. The Financial objective: value creation Goal of management: maximize the economic well-being, or wealth, of the owners (current shareholders) => maximize the price of the stock Share price today = Present value of all future expected dividends at required return

35. Lecture 1: What is finance? (II) 1.8. The Financial objective: value creation Financial managers must create or generate value for their shareholders. Economic Value Added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). The formula for calculating EVA is as follows: EVA = Net Operating Profit After Taxes - (Capital * Cost of Capital)

36. Lecture 1: What is finance? (II) 1.9. Financial main principles Rational Financial behavior Risk aversion Budgetary diversification Existence of two parts in all financial transaction Measurement by cash flows Signaling and informative asymmetry Efficiency of financial markets Direct relation of risk and return Existence of valuable ideas Financial conduct initiative The Time Value of the money and value additivity.

38. M o d e r n A p p r o a c h 1900- 1950- 1970- 1980- 1990- Classical Approach APT Model (Ross, 1970) Options Valuation Models (Black y Scholes, 1973) Portfolio selection Theory (Markowitz, 1952,1959) CAPM (widening and reformulation) Dividends Policy (Modigliani, Miller, 1963) Capital Assets Pricing Model (CAPM) (Sharpe, 1963-4, Lintner, 1965) Efficient Market Theory (Fama, 1970) Financial Structure (Modigliani, Miller, 1958) Financial Innovation Methods based on Fuzzy Sets Theory (Kaufmann y Gil, 1986-87) Chaos Theory, Non Linear Dynamics Markets Efficiency Behavioral finance 2000- Lecture 1: What is finance? (II) 1.10. Finance: historic evolution Agency Theory Information Theory Paradigm years 70

39. Lecture 1: What is finance? (II) 1.11. Main programmes in finance Managements of Investments- Capital Budgeting. Capital Structure and Dividend Policy. Market Efficiency. The Capital Asset Pricing Model. Options Theory Agency Theory Financial Planning Small Firms