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Introduction

What is finance ?

Finance is the management of money

Why is finance important ?

Investing

  • Allocating resources (money)
  • Expectation of return
    • Income
    • Profit
    • Career opportunities
  • There is a risk
  • Different investment resources:
    • endeavours: assets, seed money, ...
    • resources: time, effort, ...
    • financial assets: stocks, bonds, ...
    • business assets: business projects, property, ...

Borrowing

  • Lookin for "funding"

  • Financ. instituations will lend money

  • Expected to pay back
  • Funding for:

    • Business operations
    • Projects
    • Buy Assets

Lending

  • Financ. instituations will lend money
  • No debt
  • Funding for:
    • Business operations
    • Projects
    • Buy Assets

Saving

When companies/individuals place their money in the bank to keep

Budgeting

Deciding where to allocate the resources you have (project A vs project B)

Forecasting

Predicting the future based on past events

  • Next year
  • In 3 years
  • In 5 years

Business Roadmap

Business Roadmap Image Business Roadmap Image

Corporate Structures

Sole trader

  • Work alone
  • Unlimited liability (can lose everything)

Partnership

  • At least one member (lawyers, accountants, ...)
  • Unlimited liability (can lose everything)

Limited companies

  • Established entreprises
  • Limited liability (can only lose what was invested)

Limited Companies

Private Limited Companies ("Ltd")

  • Family, small to medium size
  • Restricted source of funding
  • Company information is restricted

Public Limited Companies ("Plc")

  • Quoted on Stock Exchanges
  • Greater funding options
  • Company info more readily available

Assets and Liabilities

ASSETS - Something a company owns, your future benefit

LIABILITIES - Something a company owes, someone else’s benefit

Assets & Liabilities Image Assets & Liabilities Image

Corporate Structure

Corporate Structure Image Corporate Structure Image

How do companies raise money ?

Debt & Equity Image Debt & Equity Image

DebtEquity
MeaningFunds owed to another partyFunds raised by issuing Shares
What is it?LoansOwn Funds
ReflectsObligationOwnership
TermShort / medium termLong-term
Status of holdersLendersProprietors
RiskLessHigher
TypesTerm Loan, BondsShares & Stocks
ReturnInterest paidDividend
Nature of ReturnFixed & regularVariable & Irregular
CollateralRequired depending on lenght of timeNot required

Main questions in finance

1. How do corporations make financial decisions? (“corporate finance”)

  • (a) Investment decisions:
    • Which projects to invest in?
    • Purchase of real assets
  • (b) Financing decisions:
    • How to fund the investments?
    • Sale of financial assets/securities (equity, debt, hybrid securities)
  • (c) Payout policy: Retain earnings or pay back to shareholders?
  • (d) Risk management: What risks to take or to avoid?

2. How do financial markets determine asset prices? (“asset pricing”)

Business Decisions Image Business Decisions Image

Key terms

  • Sole Proprietor = One employee, unlimited liability
  • Partnership = At least one member, unlimited liability
  • Corporation Limited Liability = Pay only what was invested
  • Real Assets = Tangible assets (that can be touched)
  • Financial Markets = Place where investors trade securities, stocks
  • Capital = Assets and money needed for the business to operate (long-term debts)
  • Budgeting Decision = Where to allocate the money ?
  • Financing Decision = How to fund investments ? Do we sell our assets ? How to raise funds ?
  • Capital Structure = Mix of different forms of assets (tangible, non-tangible, financial)
  • Capital Structure = Mix of different forms of external source of finance (loans, investors, ...)
  • Capital Markets = Market where debts, securities, bonds, ... are traded
  • Financial Intermediary = Middleman during a financial transaction (banks, investment banks, stockbrokers, ...)
  • Primary market = Market where securities are created
  • Secondary market = Market where securities are traded
  • Treasurer = Employee that oversees the finance department
  • Controller = Employee in charge of the accounting department and reports to CFO
  • CFO = Responsible for both finance and accounting departments
  • Agency Problems = Conflict of interest where one party is supposed to act in the best interest of another
  • Stakeholder = Person that has vested interest in a company and can either affect or be affected by the business
  • Financial Assets = Stocks, investments, shares, bonds, ...

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