**FINANCIAL MANAGEMENT REVIEWER**
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# I. GOALS AND ACTIVITIES OF FINANCIAL MANAGEMENT
(Source: Goals-of-the-Firms.pptx)
## A. Learning Objectives
- Understand the concepts that finance covers.
- Recognize forms of organization (sole proprietorship, partnership, corporation).
- Understand risk-return trade-offs.
- Define the primary goal of financial managers.
- Grasp the time value of money (TVM): present and future value.
## B. The Field of Finance
- **Bridges Economics and Accounting**:
- Economics provides context (business environment).
- Accounting provides data (income statement, balance sheet, cash flow).
- **Forward-thinking vs Historical**:
- Finance is predictive and strategic.
- Accounting measures past performance.
## C. Investments vs. Corporate Finance
- **Investments**:
- Valuing securities (stocks, bonds).
- Portfolio construction.
- **Corporate Finance**:
- Managing company assets and funding.
## D. Career Opportunities in Finance
- Corporate financial officer, banker, stockbroker, analyst, investment banker, financial planner, consultant.
## E. Activities of Financial Managers
- **Daily Tasks**:
- Monitor cash balances.
- Manage credit and inventory.
- Handle collections and disbursements.
- **Non-routine Tasks**:
- Negotiate loans.
- Issue stocks/bonds.
- Create capital budgeting and dividend policies.
## F. Risk-Return Trade-Off
- Decision-making affects both operations and financing.
- Example: Product A vs B, Capital vs Labor.
- Choice between stocks, bonds, and retained earnings.
## G. Forms of Business Organization
- **Sole Proprietorship**:
- Simple, low cost.
- Unlimited liability.
- **Partnership**:
- Shared ownership and decision-making.
- Unlimited liability unless LLP.
- **Corporation**:
- Legal entity, limited liability.
- Subject to double taxation unless S corp or LLC.
## H. Corporate Governance
- **Sarbanes-Oxley Act (2002)**:
- Reaction to corporate scandals.
- Sets governance standards.
- **Dodd-Frank Act (2010)**:
- Addresses systemic financial risks.
- **Agency Theory**:
- Owner vs Manager conflict.
- Role of institutional investors and board of directors.
## I. Goal of Financial Management
- **Shareholder Wealth Maximization**:
- Market value over short-term profits.
- Achieved through strategic, long-term decisions.
## J. Ethical Considerations
- **Social Responsibility**:
- Balancing profit with societal good.
- **Insider Trading**:
- Illegal, unethical.
- Policed by SEC.
## K. Role of Financial Markets
- **Participants**:
- Individuals, corporations, governments.
- **Markets**:
- Money vs Capital markets.
- Domestic vs International.
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# II. CAPITAL MARKETS
(Source: Capital-markets.pptx)
## A. Learning Objectives
- Identify long-term securities in capital markets.
- Understand participants in U.S. capital markets.
- Describe security markets and regulations.
## B. Overview
- **Capital Markets**: Long-term securities (>1 year).
- Bonds, common stock, preferred stock.
- **Money Markets**: Short-term securities (<= 1 year).
- T-bills, commercial paper, CDs.
## C. Globalization of Capital Markets
- **Drivers**:
- Capitalism, privatization, trade agreements (e.g., NAFTA/USMCA, EU, WTO).
- Lower telecom costs.
- **Benefits**:
- Lower cost of capital.
- Access to international investors.
## D. Securities Available
- **Government**:
- Treasury securities (short/long term).
- Municipal bonds.
- **Federal Agencies**:
- Fannie Mae, Freddie Mac, Sallie Mae, Farmer Mac.
- **Corporate**:
- Bonds, common stock, preferred stock, treasury stock.
## E. Sources of Funds
- **Internal**:
- Retained earnings, depreciation.
- **External**:
- Debt (bonds), equity (stocks).
## F. Supply of Capital Funds
- **Households**:
- Primary savers.
- Invest via banks, mutual funds, pensions.
## G. Security Markets
- **Primary Market**:
- IPOs, new stock/bond issuance.
- **Secondary Market**:
- Trading among investors.
- Provides liquidity.
## H. Market Structure
- **Traditional Exchanges**:
- NYSE, CBOE.
- **Electronic Markets**:
- NASDAQ, ECNs (e.g., SuperMontage).
- **Listing Requirements**:
- Vary by exchange; NYSE is stricter.
## I. Global and Futures Exchanges
- **Foreign Listings**:
- U.S. firms list abroad.
- Foreign firms list on NYSE.
- **Futures**:
- CME Group, used for hedging.
## J. Market Efficiency
- **Forms**:
- Weak: Prices reflect past data.
- Semi-strong: All public info.
- Strong: All info (public + private).
## K. Regulations
- **SEC** oversees securities laws:
- Securities Act of 1933.
- Securities Exchange Act of 1934.
- Securities Acts Amendments (1975).
- **Purpose**:
- Prevent fraud.
- Ensure transparency and fairness.
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# III. TIME VALUE OF MONEY (TVM)
(Source: TIME-VALUE-OF-MONEY.pptx)
## A. Learning Objectives
- Understand TVM: present and future value.
- Calculate rate of return, annuities.
- Adjust for compounding periods.
## B. Key Concepts
- A dollar today > dollar tomorrow.
- Used for investment, loan, capital budgeting decisions.
## C. Future Value (FV)
- Formula: FV = PV(1 + i)^n
- Example: $1,000 at 10% for 4 years = $1,464.10
## D. Present Value (PV)
- Formula: PV = FV / (1 + i)^n
- Example: $1,464 at 10% for 4 years = $1,000
## E. Solving for Interest Rate and Periods
- **Interest Rate**:
- i = (FV / PV)^(1/n) - 1
- **Periods**:
- n = ln(FV / PV) / ln(1 + i)
## F. Annuities
- **Ordinary Annuity**: Payments at end of each period.
- **Annuity Due**: Payments at beginning.
## G. Annuity Formulas
- **Future Value of Annuity**:
- FV_A = A * [(1 + i)^n - 1] / i
- **Present Value of Annuity**:
- PV_A = A * [1 - (1 + i)^-n] / i
## H. Determining Payments (A)
- Given PV/FV, solve for A:
- A = FV / FV_IFA
- A = PV / PV_IFA
## I. Loan Amortization
- Part of each payment = interest.
- Remainder reduces principal.
## J. Compounding Frequency
- Adjust i and n accordingly:
- i = annual rate / # of periods per year.
- n = years * periods per year.
## K. Deferred Annuity
- Payments start after a delay.
- Present value calculated by discounting each payment.
- May involve mixed streams of payments.
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This reviewer provides complete, detailed coverage of all three slide decks: Goals of the Firm, Capital Markets, and
Time Value of Money from Foundations of Financial Management, 18th Edition by Block, Hirt, and Danielsen.
