Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith...
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Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 1
INDEX
1. Finance Overview.2. Defining Finance.3. Corporate Finance.4. Investment: Assets.5. Resources: Equity and Liabilities.6. Relationships between Investment and
Financing7. Functions of the Financial Manager.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 2
• To manage your personal resources.
• To set up a new business.
• To pursue interesting and rewarding career opportunities in Finance.
Reasons to study Finance:
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 3
Defining Finance
Finance….• is analytical.• is based on economic principles.• uses accounting information as an input for decision-making.• is global in perspective.• is constantly changing.• is the study of how to invest and raise money productively.
The field of Finance deals with the concepts of time, money, and risk and how they are interrelated. It also deals with how money is spent and budgeted.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 4
Defining Finance
Concept of Finance:
Finance Theory is the study of the behaviour of individuals in the intertemporal allocation (over time) of their resources in an uncertain environment, and the study of the function of economic institutions and markets in making these allocations possible.
EconomíaFinancieraMarín, José M. / Rubio, Gonzalo
Antoni Bosch, Editor, Barcelona, 2001
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 5
Finance can be divided into three main related areas:
Corporate finance: Refers to the acquisition, financing and investment management. Require the use of knowledge of economics, accounting, law, financial mathematics and statistics, among others.
Financial Markets and Institutions: Includes the study of the banking system and markets.
Assets evaluation: Estimating the value of assets through models. Very useful for making financial decisions.
Defining Finance
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 6
Is about financial decisions made by corporations.
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).
Corporate Finance
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 7
The discipline can be divided into long-term and short-term decisions and techniques (according the time horizon)
•Long-term decisions: Which projects receive investment. Whether to finance that investment with equity or debt when or whether to pay dividends to shareholders.
•Short-term decisions: Deals with the short-term balance of current assets and current liabilities. The focus here is on managing cash, inventories, and short-term borrowing and lending.
Corporate Finance
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 8
Corporate Finance: Real Assets and Financial Assets
The financial manager needs real assets and financial assets:
Real assets: These are used to produce the firm's products and services. They include tangible assets such as Machinery, Factories, Vehicles, and Offices. Furthermore, real assets include intangible assets such as Technical knowledge (intellectual property IP), Trademarks, and Patents.
Financial assets: The firm finances its investments in real assets by issuing financial assets (bonds, shares, etc) in the financial market for investors. A share or stock is a financial asset which has a value as a claim on the firm's real assets and on the income those assets may produce.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 9
Corporate Finance
Firm's
operations
(real
assets)
Financialmanager
Financialmarkets
(investorsholding
financialassets)
The financial manager stands between the firm’s operations and the financial (or capital)
markets, where investors hold the financial assets issued by the firm.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
WorkingCapital
Shares
Loans
Bonds
MANAGER
FINANCINGASSETS
€
FINANCIAL ASSETS ENABLE FINANCING TO BE DIVIDED INTO AFFORDABLE PRODUCTS FOR INVESTORSPg.
10
FINANCIAL ASSETS
Corporate Finance
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Quiz
Fit each of the following terms into the most appropriate space: financing, real, shares, airplanes, financial, investment, brand names.
Companies usually buy ________ assets. These include both tangible assets such as ____________ and intangible assets such as __________________. In order to pay for these assets, they sell ______________ assets such as _________.The decision regarding which assets to buy is usually termed the __________ decision . The decision regarding how to raise the money is usually termed the _____________ decision.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg 12
TangibleIntangibleFinancial
Inventories
Accounts Receivable
Cash
ASSETS
Fixe
d A
ssets
Curr
ent
Ass
ets
ASSETS INVESTMENTS
Investment or Assets.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 13
Investment or Assets.
ASSETS INVESTMENTS
Assets are resources (money, properties or rights) of the business enterprise.
Assets fall into one of two categories:• Current assets• Fixed or non-current assets
Current assets are assets that can be turned into cash in one operating cycle.
Non-current assets are all other assets; that is, assets that cannot be liquidated quickly.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 14
Investment or Assets.
Current assets are likely to be used or turned into cash in the near future.
Fixed assets have a gross and a net value. The Gross Value is what the assets originally cost, but they are unlikely to maintain their value. Accountants must estimate the depreciation in the value of these assets.
The company also has valuable intangible assets, such as its brand name or skilled management and is called goodwill.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 15
Investment and Assets.
Example:
ASSETS
Non- Current Assets:
Property and equipment
Minus accumulated depreciation
Net- Non Current Asset (fixed assets)
Net intangible assets
Other fixed assets
Current Assets
I nventories
Accounts receivable
Other current assets
Cash and equivalent
Total Assets
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pág. 16
FINANCIAL STATEMENT RESOURCES
Common StockRetained EarningsLong Term Debt
Bank LoansOther long term
liabilities
RESOURCES
Long
Ter
m L
iabi
litie
sS
hort
Ter
m
Liab
ilitie
s Short Term LoansAccounts Payable
Other Current Liabilities
Resources: Equity and liabilities
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 17
Resources: Equity and liabilities
Equity = ownership of the business enterprise.
The difference between assets and liabilities represents the amount of the shareholders´equity.
Every corporation has common equity.
Equity also includes retained earnings or capital in excess .
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 18
Resources: Equity and liabilities
Liabilities are obligations of the business enterprise. They are either current liabilities or long-term liabilities.
Current liabilities are obligations due within one year.
1. Accounts payable are amounts due to suppliers for purchases on credit.
2. Wages and salaries payable are amounts due to employees.
3. Short-term bank loans or current portion of long-term debt.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 19
Resources: Equity and liabilities
Long-term liabilities are debts that last more than one year.
There are different types of long-term liabilities, including:
1. Payable notes and bonds, which are loans in the form
of securities.
2. Bank loans.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 20
Example:
EQUITY & LIABILITIES
Equity
Common stock (shareholder equity)
Retained earnings
Non- Current Liabilities
Long-term debt
Bank loans
Other long-term liabilities
Current Liabilities
Short-term loans
Accounts payable
Accrued income taxes
Other current liabilities
Total Equity & Liabilities
Resources: Equity and liabilities
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 21
Balance Sheet
ASSETS EQUITY & LIABILITIES
Non- Current Assets: Equity
Property and equipment Common stock (shareholder equity)
Minus accumulated depreciation Retained earnings
Net- Non Current Asset (fixed assets) Non- Current Liabilities
Net intangible assets Long-term debt
Other fixed assets Bank loans
Other long-term liabilities
Current Assets Current Liabilities
I nventories Short-term loans
Accounts receivable Accounts payable
Other current assets Accrued income taxes
Cash and equivalent Other current liabilities
Total Assets Total Equity & Liabilities
• The balance sheet is a report of the assets, liabilities, and equities of a firm at a point in time (generally at the end of a fiscal quarter or fiscal year).
• The balance sheet is made up of assets, equity, and liabilities.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pag 22
If R(%) > K(%) or r(%) = or >0 then the project is feasible
Profitability and Costs of Capital
ProfitabilityRate of Return: R(%)
Cost of Capital (dividends + interest)
K (%)
ASSETS
BALANCE SHEET
EQUITY
LIABILITIES
R (%) - K(%) =Net Return: r (%)
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 23
Two different points of view in Finance
Both want to maximize Net Profit = dividends + retained earnings.
Their opinions differ about the allocation of Net Profit.
ASSETS
EQUITY
LIABILITIES
Point of viewof Shareholders
Point of viewof the manager
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 24
Functions of the Financial Manager
The financial manager faces three decision areas, which define the content of Corporate Finance.
- First, how much money should the company invest? What kind of assets must be acquired? What cash flows are expected? These are the investment decisions.
- Second, which financing structure is the best? Which is the length of time that funds will be needed? These are the financing decisions.
- Third, the financial manager stands between the firm’s operations and the financial (or capital) markets, where investors hold the financial assets issued by the firm.
The function of the financial manager is the management of cash flows to make a profit for the firm´s owners.
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Functions of the Financial Manager
Financial management requires the coordination of all areas of a business to effectively benefit the owners. Within a company, financial decision-making is usually managed by the Chief Financial Officer The Controller and the Treasurer.
Pg. 25
CHIEF FINANCIAL OFFICER (CFO)Responsible for:
• Financial policy• Corporate Planning
TREASURER Responsible for:
• Cash Management• Raising capital• Banking Relationships
CONTROLLER Responsible for:
• Financial Statements• Accounting• Taxes
Introduction to Finance Department of Finance and Operations Management Instructor :Martha Edith Bellini
Pg. 26
REALASSETS
CASH CASH
CASH CASH
INVESTORS
FINANCIALMANAGER
ACTIVITY OFTHE COMPANY
FINANCIALASSETS
Remuneration and repayment
of funds
Functions of the Financial Manager