BBAZ16007-Fundamentals of Finance

`
Dr. Fai Lim Loi (Dennis)
School of Business
Macau University of Science and
Office Hour:
Technology
Mon: 12:00 – 15:00
Dr. Fai Lim Loi
Wed: 10:00 – 12:00
School
2025of Business
Fall Thu: 10:00 – 12:00
Macau University of Science and Technology
Fri: 10:00 – 13:00
2024 Fall
Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance
Syllabus

1. Financial Statements, Taxes, and Cash Flow

2. Working with Financial Statements
3. Introduction to Valuation: The Time Value of Money
4. Discounted Cash Flow Valuation
5. Interest Rates and Bond Valuation
6. Equity Markets and Stock Valuation
7. Net Present Value and Other Investment Criteria
8. Risk and Return
9. Fintech

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Objectives

• To help you understand that value creation is the fundamental

aspects of management
• To analyze financial statements and make sound financial decisions
• To aware the time value of money, and some common valuation
methods
• To understand the concept of risk and return

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Textbook

Essentials of
Corporate
Finance
12th Edition
Release: 2025

Stephen A. Ross Randolph W. Westerfield Bradford D. Jordan

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Assessment Methods

Assessments
Class Participation 10%
Assignment 10%
Mid-term
30%
** Scheduled on Oct 26, 2025

Final Examination 50%

Total: 100%

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Connect ID
• Connect ID: https://connect.mheducation.com/class/f-loi-bbaz16007

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Class 1: Introduction

• 1.1 Finance: A Quick Look.

• 1.2 Business Finance and The Financial Manager.
• 1.3 Forms of Business Organization.
• 1.4 The Goal of Financial Management.
• 1.5 The Agency Problem and Control of the Corporation.
• 1.6 Financial Markets and the Corporation.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Basic Areas of Finance

1. Corporate finance = Business finance

2. Investments
• E.g., Stocks and bonds
3. Financial institutions
• E.g., banks and insurance firms
4. International finance
• E.g., portfolio managers and analysts specialized oversea investments
5. FinTech

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Investments

• Work with financial assets such as stocks and bonds

• Value of financial assets, risk versus return, and asset allocation
• Job opportunities
• Stockbroker or financial advisor
• Portfolio manager
• Security analyst

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Financial Institutions

• Companies that specialize in financial matters

• Banks—commercial and investment, credit unions, savings and
loans.
• Insurance companies.
• Brokerage firms.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

International Finance

• An area of specialization within each of the areas discussed so far

• May allow you to work in other countries or at least travel on a
regular basis
• Need to be familiar with exchange rates and political risk
• Need to understand the customs of other countries; speaking a
foreign language fluently is also helpful

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Fintech

• The combination of technology and finance is called fintech

• A broad term for a company that uses the internet, mobile phones,
software, and/or cloud services to provide financial service
• Perhaps you might have heard about mobile payments, blockchain
and cryptocurrency

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Why Study Finance?

• Marketing
• Budgets, marketing research, marketing financial products
• Accounting
• Dual accounting and finance function, preparation of financial statements
• Management
• Strategic thinking, job performance, profitability
• Personal finance
• Budgeting, retirement planning, college planning, day-to-day cash flow issues

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Business Finance and the Financial Manager

• Some important questions that are answered using finance:

• What long-term investments should the firm take on?
• Where will we get the long-term financing to pay for the investments?
• How will we manage the everyday financial activities of the firm?
• Financial managers try to answer some, or all, of these questions.
• The top financial manager within a firm is usually the Chief Financial
Officer (CFO).
• Treasurer—oversees cash management, credit management, capital
expenditures, and financial planning.
• Controller—oversees taxes, cost accounting, financial accounting, and data
processing.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Corporate Organization Chart

A simplified
organizational
chart
The exact titles and
organization differ
from company to
company.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Financial Management Decisions

• Capital budgeting
• What long-term investments or projects should the business take on?
• Capital structure
• How should we pay for our assets?
• Should we use debt or equity?
• Working capital management
• How do we manage the day-to-day finances of the firm?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Forms of Business Organization

• Three major forms in the United States

1. Sole proprietorship: Simplest type of business. The owner keeps all
the profit, but also bear unlimited liability for business debt
2. Partnership: Two or more owners
• General partners: Share gains and losses as defined in partnership agreement
• Limited partners: One or more general partners will run the business and
have unlimited liability
3. Corporation

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Sole Proprietorship

• Business owned by one person

• Advantages. • Disadvantages.
• Easiest to start. • Limited to life of owner.
• Least regulated. • Equity capital limited to
• Single owner keeps all of owner’s personal
the profits. wealth.
• Taxed once as personal • Unlimited liability.
income. • Difficult to sell
ownership interest.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Partnership

• Business owned by two or more persons

• Advantages. • Disadvantages.
• Two or more owners • Unlimited liability
• More capital available • General partnership
• Relatively easy to start • Limited partnership
• Income taxed once as
personal income • Partnership dissolves when
one partner dies or wishes
to sell
• Difficult to transfer
ownership
Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance
Corporation

• A legal “person” distinct from owners and a resident of a state

• Advantages. • Disadvantages.
• Limited liability • Separation of ownership and
• Unlimited life management (agency problem)
• Separation of ownership and • Double taxation (income taxed at the
management corporate rate and then dividends
• Transfer of ownership is easy taxed at personal rate, while dividends
paid are not tax deductible)
• Easier to raise capital

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Goal of Financial Management

• What should be the goal of a corporation?

• Maximize profit?
• Short-term, long-term, or what?
• Minimize costs?
• Maximize market share?
• Maximize the current value per share of the company’s existing
stock.

Generally speaking:
• Maximize the market value of the existing owners’ equity.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Goal of Financial Management

• Does this mean we should do anything and everything to maximize

owner wealth?
• Our goal does not imply that the financial manager should take illegal
or unethical actions in the hope of increasing the value of the equity

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Enron Case

• Enron was an energy-trading and utility company based in Houston,

Texas, that perpetrated one of the biggest accounting frauds in history.
• Enron's executives employed accounting practices that falsely inflated
the company's revenues and, for a time, made it the seventh-largest
corporation in the United States.
• Once the fraud came to light, the company quickly unraveled, filing
for Chapter 11 bankruptcy in December 2001

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Enron Case

• Enron was an energy company that began to trade extensively in energy

derivatives markets.
• The company hid massive trading losses, ultimately leading to one of the largest
accounting scandals and bankruptcy in recent history.
• Enron executives used fraudulent accounting practices to inflate the company's
revenues and hide debt in its subsidiaries.
• The SEC, credit rating agencies, and investment banks were also accused of
negligence—and, in some cases, outright deception—that enabled the fraud.
• As a result of Enron, Congress passed the Sarbanes-Oxley Act to hold corporate
executives more accountable for their company's financial statements.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Sarbanes-Oxley Act (SOX, 2002)

• Driven by corporate scandals.

• Enron, Tyco, WorldCom, Adelphia.
• SOX Intended to strengthen protection against accounting fraud and
financial malpractice.
• Compliance very costly.
• Some unintended results. Firms driven to:
• Go public outside the U.S.
• Go private (“go dark”).

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

The Agency Problem

• Agency relationship
• Principal hires an agent to represent its interests
• Stockholders (principals) hire managers (agents) to run the company
• Agency problem
• Conflict of interest between principal and agent
• Management goals and agency costs.

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Recent Study

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Do Managers Act in the Shareholders’ Interests?

• Managerial compensation
• Incentives can be used to align management and stockholder interests.
• Incentives need to be carefully structured to ensure that they achieve their
goal.
• Corporate control
• Threat of a takeover may result in better management.
• Other stakeholders
• Note: Agency problems are not unique to corporations; they exist
whenever there is a separation of ownership and management

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Cash Flows Between the Firm and the Financial Markets

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Brief Recap

1. What are the five basic areas of finance?

2. What are the three types of financial management decisions, and
what questions are they designed to answer?
3. What are the three major forms of business organization?
4. What is the goal of financial management?
5. What are agency problems, and why do they exist within a
corporation?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

What are the five basic areas of finance?

1. Corporate Finance
2. Investments
3. Financial Institutions
4. International Finance
5. Fintech

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Brief Recap

1. What are the five basic areas of finance? 

2. What are the three types of financial management decisions, and
what questions are they designed to answer?
3. What are the three major forms of business organization?
4. What is the goal of financial management?
5. What are agency problems, and why do they exist within a
corporation?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

What are the three types of financial management decisions, and what
questions are they designed to answer?

• Capital budgeting
Deal with long-term investment or what projects should the business take on
• Capital structure
What mixture of debt and equity should we use to fund our investment project?
• Working capital management
How should the firm manage its everyday financial activities?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Brief Recap

1. What are the five basic areas of finance? 

2. What are the three types of financial management decisions, and
what questions are they designed to answer? 
3. What are the three major forms of business organization?
4. What is the goal of financial management?
5. What are agency problems, and why do they exist within a
corporation?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

What are the three major forms of business organization?

1. Sole proprietorship
2. Partnership
3. Corporation

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Brief Recap

1. What are the five basic areas of finance? 

2. What are the three types of financial management decisions, and
what questions are they designed to answer? 
3. What are the three major forms of business organization? 
4. What is the goal of financial management?
5. What are agency problems, and why do they exist within a
corporation?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

• What is the goal of financial management?

• The goal of financial management in a for-profit business is to make

decisions that increase the value of the stock, or more generally,
increase the market value of the equity

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

Brief Recap

1. What are the five basic areas of finance? 

2. What are the three types of financial management decisions, and
what questions are they designed to answer? 
3. What are the three major forms of business organization? 
4. What is the goal of financial management? 
5. What are agency problems, and why do they exist within a
corporation?

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance

What are agency problems, and why do they exist within a corporation?

Basically, there is a conflict of interest between principal and agent, as

the goals of management and agents might not align

Fai Lim Loi (Dennis), School of Business BBAZ16007 – Fundamentals of Finance