Chapter 1

What is Finance? Finance is study of how people and business evaluate investments and raise capital to fund them. The goal of Financial Manager Making investment decision Making decisions on how to finance these investment(How to finance the development) Managing funding for the companys day to day operation.

Maximizing shareholders wealth The goal of the firms is to maximizing shareholders wealth 3 legal forms business 1. Sole proprietorship It a business owned by a single individual who is entitled to all the firms profits and who is also responsible for all the firms debt, that is, what the firm owes. In effect, there is no separation between the business and the owner when it comes to debts or being sued. 2. Partnership A general partnership is an association of two or more persons who come together as co-owners for the purpose of operating a business for profit. Limited partnership 2 classes of partners (general and limited) General partnership Run the business and faces unlimited liability for the firms debt. 3. Corporation Large sum of money are needed to build a business, then the typical organizational form chosen is the corporation. The corporation legally functions separately and apart from its owners. Three primary advantages owner liability is confined to the amount of their investment in the company. - Separate legal status for the corporation is that the life of the business is not tied to the status of the investors. - Ease of rising the capital. Easy to convinced investors to invest money in corporation knowing that the most they can lose is what they invest. And can easily sell their stock as they wish. Financial institution

Financial institution is intermediaries that channel the savings of individuals, business, and government into loans or investment. The key suppliers and demanders of funds are individuals, business and government. In general, individuals are net suppliers of funds, while business and governments are net demanders of funds.

Financial Market Financial market provides a forum in which suppliers of funds and demanders of funds can transact business directly. The two key financial markets are the money market and the capital market. Money Market

The money market exists as a result of the interaction between the suppliers and demanders of short-term funds (those having a maturity of a year or less).

Most money market transactions are made in marketable securities which are short-term debt instruments such as T-bills and commercial paper. Money market transactions can be executed directly or through an intermediary

Capital Market

The capital market is a market that enables suppliers and demanders of long-term funds to make transactions. The key capital market securities are bonds (long-term debt) and both common and preferred stock (equity). Bonds are long-term debt instruments used by businesses and government to raise large sums of money or capital. Common stock are units of ownership interest or equity in a corporation.

3 players in the financial market Borrower Investors Financial Institution 4 basic principles of finance 1. Money has a time value

A dollar received today is worth more than a dollar we received in the futures.

2. There is a Risk-Return Tradeoff Wont take risk on additional risk unless we expect to be compensated with additional return.

3. Cash flow is the source of Value. Profit is an accounting concept designed to measure a business performance over an interval of time. Cash flow is the amount of cash that can be actually be taken out of the business over this same interval.

4. Market prices reflect information Investors respond to new information by buying and selling their investment. The speed with which investors act and the way that prices respond to the information determine the efficiency of the market.

Types of Security 1. Debt securities Firms borrow money by selling debt securities in the debt market. Less than 1 year sold at short term market (money market) More than one year or have maturity period between 1- 10 years is called note. - Longer than 10 years s called bond. - Sold in the capital market. Capital market market for the long term financial instruments. Bonds pay a fixed interest rate.

2. Equity Security Represent ownership of the corporation. 2 major types securities Common stock - Preferred stock When you buy equity security you are making an investment that you expect will generate return. But return is less certain.

Common Stock Represent equity ownership in a corporation, provide voting right, and entitles the holder to a share of the company success in the forms of dividends.

Preferred stock Like common stock, is an equity security. However, preferred stockholder take a preferred position relative to common shareholders. Preferred shareholder received their dividend before any dividend are distributed to the common stockholder.

Stock Market A stock market is a public market in which the stock of companies is traded.

Chapter 2

Overviews of Firms Financial Statements

Basic Financial Statements i) Income statement Describe a company revenues and expenses along with resulting profit or loss over a period of time due to earnings activities. Statement of owners equity Explains changes in equity from profit ( or loss) and from the owner investments and withdrawals over a period of time. Balance sheet Describe a companys financial position( types and amounts of asset, liabilities and equity) at a point in time. Statement of Cash Flows Identifies cash inflows (receipts) and cash outflows 9payments) over a period of time.

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Why study financial statement? 1. Financial statement analysis To access financial position of the firms 2. Financial control Manger use financial statement to control and monitor the firms operation. 3. Financial forecasting and planning Financial statement provide universally understood format for describing a firms operation.

Users of financial statement analysis 1. 2. 3. 4. 5. 6. 7. 8. Managers Employees Creditors Bank and Financial Institutions Government Customers Investors Shareholders

Advantages of financial report to the users

 Financial reports are used by a range of users making a variety of decisions The purpose of financial reports is to provide the information required by users to assist them in their decision-making capacity Financial analysis is an analytical tool that involves expressing the reported financial numbers in relative terms Financial analysis helps report users to evaluate an entitys past decisions and form an opinion as to the entitys future financial health