Finance
define finance
the study of how money is allocated between lenders and borrowers
the three financial principles
1) cash flow matters
2) money has time value
3) high risk = high reward
real vs financial asset
real = tangible
financial = $
types of financial instruments
debt instruments
equity instruments
goal of the firm
create value by maximizing stock price
time present value formula
P = F/(1+r)^n
function of money
1) medium of exchange
2) standard of value
3) store of value
common vs preferred stocks
common: voting rights, dont always get $
preferred: fixed payments, after bondholders and creditors
role of management
calculate net present value
1) present value of inflow
2) present value of outflow
3) net present value = inflow - outflow
channels of money transfer
financial intermediary
non-market intermediary
market intermediary
primary vs secondary markets
primary : new securities
secondary : trading environment
types of claims someone can have on a company
1) contractual claim
2) residual claim
how to decide acceptable project
positive, zero = acceptable project
negative = unacceptable project
intermediation definition
transfer funds from lender to borrower
money vs capital markets
money : short term debt
capital : longer than one year
role of financial managers
1) capital budget decisions
2) capital structure decisions
3) operating decision
what is diversification
risk can be diversified by investing in many many different things
types of channels
2) second
3) third
auction vs over-the-counter market
auction : bidding, physical
OTC : network of dealers